March was another positive month for European equities. Political news dominated and with further declines in bond yields, Financials were the worst performing sector and Consumer Goods the best.
During March, we initiated one new ‘Special Opportunities’ position (Osram) and sold one ‘Compounder’ (Amadeus) and one ‘Improver’ (Deutsche Post). As a reminder, ‘Special Opportunities’ tends to be the smallest of the three investment categories that we will consider. We tend to spend more of our time trying to identical ‘Compounders’ and ‘Improvers’; the former is where we see returns as being high and sustainable and the latter is where we have identified the potential for returns to materially improve over the medium term.
We see Osram as offering a compelling risk/reward at current share price levels. The market is well aware of the cyclical issues that the company are faced with at present. Osram produces automotive and general industrial lighting, associated components and semiconductors; all of their end markets are currently experiencing falling activity levels and as a result, the company announced a profit warned during March (their third in the last 12 months). With the market fixated on short term demand conditions, we see two points of attraction in the investment case. First, the company remain in advanced discussions with a number of private equity companies and we see a deal, if anything, as more likely following the recent profit warning. Second, we do not see their current difficulties as suggestive of a fundamental impairment to their long term earnings power – but this is what we believe that market is pricing in at these share price levels.
The Spanish software business Amadeus has many attractive features and we have been shareholders for a long time. However, we sold our position in March for a couple of reasons. First, we feel that they have benefitted from a significant tailwind of strong global air passenger growth and we expect the next few years to be tougher than the last few in that regard. Second and more fundamentally, we question whether their market position in hotel software will ever be as good as their existing market position in airline software and the company is certainly priced for continued success.
Deutsche Post is a business that we have long felt is under-earning and has the potential for improvement. However there are a number of reasons why we have wavered in that view over the past 12 months and after gradually reducing our position size, have finally decided to exit. First, we are worried that the Express business will begin to see some of the weakening end market conditions already being felt by its close peer Fedex. Second, the German legacy postal business is experiencing structural volume decline that is becoming more and more difficulty to offset with efficiency measures and the regulator seems to being far from supportive. Finally, cash generation has consistently disappointed versus our expectations.
We have had a decent start to the year and will continue to try to identify the best opportunities for investment in a disciplined and systematic way.