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Morningstar | DHL's Express Unit Seeing Solid Growth; Cost Management in Focus for the Post and Parcel Segment

Deutsche Post DHL is the leading postal operator in Europe, among the top three international express package providers, and the world's largest air and ocean forwarder. Its legacy German postal operations (16% of total revenue) are facing a gradual, secular decline in demand and a restrictive regulatory environment. However, we expect growth in the DHL segments (roughly 70% of revenue) and momentum in the e-commerce/parcel division (15%)--particularly German parcel-delivery--to sufficiently offset declines in traditional mail-related activity over the long run. DHL Express is well-positioned in international express parcel markets that touch Europe and North America, and its global air and ocean forwarding unit is benefiting from IT reorganization efforts and decent global trade activity over the past few years. Additionally, heavy network investment and aggressive efficiency initiatives in years past are driving solid margin expansion and market share gains at Express. Deutsche Post DHL has emerged from a period of significant restructuring, as the global recession exposed struggling ventures and highlighted the need to improve efficiency. In 2008 and 2009, the company shuttered its loss-making U.S. domestic express business and shed its banking segment while accelerating major expense-reduction initiatives; it reduced its cost base by about EUR 1 billion. In 2010, the company sold unprofitable day-definite domestic express operations in the United Kingdom and France. In 2011, it sold ETS, its U.S.-based freight brokerage operation, to U.S. rail-intermodal specialist Hub Group, and in 2013 it sold its domestic express operations in Australia, New Zealand, and Romania. The more streamlined international express operations have since posted impressive profitability improvement while capitalizing on e-commerce tailwinds and opportunities to gain market share. More recently, the Post-eCommerce-Parcel division is tackling cost inflation linked to rapid parcel-network growth and rising labor costs, but we expect a positive outcome given management's track record of solid execution.