check.markets

check.markets is my first coding project aiming to optimize my trading algorithm in python. My ultimate goal is to introduce automatic trading on a daily basis with it. The purpose of this blog is to document the trading results, learnings and to discuss coding ideas that I struggle with. I would love you to join me on this journey. Your contribution is greatly appreciated. I'm looking forward to great conversations.

Much too late on our watchlist: MAERSK

A.P. Moller-Maersk is connecting and simplifying the world’s supply chains, and aspires to provide truly integrated logistics. Across oceans, ports, on land and in the air, they are combining their supply chain infrastructure with the power of their people and technology to drive end-to-end innovation that accelerates their customers’ success. By delivering innovative logistics solutions the company believes they can give the companies they serve a significant edge and help them realise their full potential. With a dedicated team of 95,000 talented people, operating in more than 130 countries, they are going all the way to digitise, democratise and decarbonise the world’s supply chains and in doing so reinvent the logistics industry and improve life for all.


Taking a 5 year look on the company's financials, one can learn that the company hardly offers any possibility for prediction. Its figures for revenue, OCF or FCF range from the very low numbers up to the highest unimaginable numbers. A.P. Moller-Maersk is currently the 2nd largest container ship company worldwide behind the Chinese market leader. Despite being in such a good market position and working in such a complicated, demanding cyclical business field, Maersk is strongly challenged by external factors. What the affects on the financial figures between 2015 and 2021 were, can be seen here: 

  • Avg Revenue Growth (+10% p. a.)
  • Decline of number of shares outstanding (-11%)
  • Total equity ratio +9%p up to 63%
  • Financial debt ratio +1%p up to 21%
  • Avg OCF ratio 16%
  • Avg FCF ratio 7%
  • Avg adj. Dividend of $2.1bn (4%)
  • Net cash 2021 at $1.5bn


Revenues: For financial year 2021, Revenues increased by USD 22.0bn, mainly driven by higher freight rates in Ocean, volume increases and acquisitions in Logistics & Services and higher global demand and increased storage income in Terminals. A significant and increasing part of Ocean volumes is on long-term contracts as part of the strategic transformation, with an increase in the rates of around 50% or USD ~1,000 per FFE during 2021. Five years ago, A.P. Moller - Maersk was a diversified conglomerate. They are now well on their way to becoming a fully integrated logistics company that offers

  • ocean,
  • air and
  • land transportation
  • as well as fulfilment services and digital supply chain management

to our customers globally.

The vision the company defined in 2016 of becoming The Global Integrator of Container Logistics – connecting and simplifying our customers supply chains, has been validated by customer demand over the last two years. Their strategy of offering end-to-end and integrated logistics based on control of crucial capacity:

  • ships,
  • containers,
  • warehouses,
  • ports and
  • aircrafts

has delivered massive growth in Logistics & Services. For customers, the need arises to rethink and realign their global logistical strategy.




47,8% discount for Fabasoft - worth a buy?

Imagine a small company owning strong brands losing nearly 50% of its value due to EPS decreases that it has announced recently. Imagine this being Fabasoft, one of the best reputed companies in the digitalization field in Austria. Should we make use of this strong decline?

With an innovative portfolio of products and services, Fabasoft contributes to simplifying, accelerating and improving the quality of document and process management in all business areas. Data protection and data security always have top priority. This is why they are one of the leading European software manufacturers and cloud service providers and have enjoyed the trust of numerous multinational companies and public sector organizations since its foundation in 1988.

The majority stockholders are as follows:

  • 42,9% Fallmann & Bauernfeind Privatstiftung
  • 36.9% Float
  • 4,2% Invesco Advisers, Inc.
  • 4.0% Axxion SA (Luxembourg)
  • 3.6% Danske Bank A/S (Investment Management)

And this leads us to the first important conclusion: Fabasoft is an owner-operated company. Fabasoft's CEO, Professor Fallmann, is also the majority owner of the company's shares. This should enable the company to act in a long-term manner and in a visionary way instead of being driven by short-term issues and problems. 


In its 9M report from 31 Dec, 2021, the company had the following geographical revenue breakdown:

  • 55% Austria
  • 35% Germany
  • 4% Switzerland


Fabasoft managed to double its revenues from 27.6 EURm in 2016 to 55.9 EURm in 2021 (MRQ). Net income even quadrupled from 2.3 EURm to 8.8 EURm. 

Despite this strong growth figures, Fabasoft succeeded in growing its business without depending on external financing. The company has always shown (steadily growing) net cash peaking at 43 EURm in 2021. However, this is not followed by high equity ratios. Fabasoft currently has an equity ratio of around 55%.

Another exceptional fact about Fabasoft's balance sheet is its cash position. The company had 58.5 EURm in cash of total assets of 76.6 EURm in 2020. So the company holds more than 60%(!) of its assets in cash. High cash ratios mean great possibility and probability of near-term cash usage. They could 

  • acquire companies
  • pay dividends
  • buyback shares
  • found new plants or
  • found new business segments.

As we could see throughout the last years, Fabasoft used high ratios of its cash position for dividend payouts. In 2020, Fabasoft paid dividends of 7.2 EURm. In percent, this is 3.4% as of April 11. For a tech company, dividends payouts at such high rates are rare. Due to its heavy 48% discount, Fabasoft increased its dividend yield immensely, nearly doubling it. Since 2016, Fabasoft has increased its dividend payout from 2.1 EURm to 7.2 EURm, nearly quadrupling it. 

The company's current valuation figures are (still) pretty high. Despite its decreasing EPS, Fabasoft managed to increase revenue throughout the last 9 months. Although this may appear as a strong signal, it is not. In case of a growth stock that attracts high shareholder interest, growth is too low. Fabasoft needs to either increase its efforts to grow or it will consolidate (even further).


What we like about this stock is its healthiness. During times in which we face rising interest rates and higher insecurity due to inflation, shortness and energy price hikes, companies like Fabasoft especially show their fundamental strength: with net cash, impressing cash ratios and high dividend payouts this stock remains interesting. 

What we do not like about Fabasoft is its valuation. We currently deal with valuation figures shown below:

                                  2020      

P/S                              4,9

P/E                            30,6

P/B                              6,9

P/OCF                       12,8

P/FCF                        16,4    

OCF margin              38,1%

FCF margin              29,9%

D/E                              0,14



Frequentis - a guardian angel?


- Sales increases. Based on the last few years, the company underlined its market leadership with an attractive sales development (2016: 240 EURm, 2021: 330 EURm), which was hardly affected during Corona (sales minus between 2019 and 2020 -400 EURk, i.e. a good 1.5 %). This is due to the fact that the business serves a business area that is not sensitive to the economy because it is safety-critical for every customer.

- Entry barriers. Frequentis operates in two business areas that are highly critical on the customer side and require tenders in order to be implemented. Specifically, these are the two business segments

  • Air & Traffic Management (ATM) with a turnover share of approx. 60% and
  • Public Safety & Transport (PST) with a turnover share of approx. 40%.
The ATM segment deals with civil airspace security (data service provider for air traffic control, data service provider for flight information, airports, service providers for unmanned air traffic and space agencies) on the one hand and defense on the other hand (air forces, army, navy, internal security, combined armed forces).

The PST segment deals with services that serve public security. Services for the police, fire brigade, rescue services and critical infrastructures for industrial customers are collected in the Public Safety sub-segment. The public transport sub-segment includes services for railway companies and other public transport companies. The third sub-segment, shipping, serves coast guards, offshore installations, ports and search and rescue services.

As can be clearly seen in both business segments, the majority of customers in both areas are official (public) customers. 90% of the sales from 2020 were generated from contracts with existing customers. This is due to the fact that e.g. existing contracts in air traffic control are closed for a period of 20-25 years. Customers are served with services, maintenance and training.

- Debt situation. Frequentis is in the excellent position of having net cash of a good EURm 80 over the past two years. This means that the financial debt is so small that it could be completely dissolved with the current cash and cash equivalents. This would also have been possible with the free cash flow position in both years at once. This underlines the outstanding financial policy of the Austrian company.

- Clear strategic direction. In the IR call, Mr. Marin additionally stated that the company is also in a position to turn down customers if you have negative feelings about them, since the company is not geared towards the short term, but rather the long term. This, coupled with the fact that acquired companies should account for a maximum of 10% of sales in the case of acquisitions, shows that Frequentis is proceeding in a very controlled and experienced manner. When it comes to acquisitions, Frequentis usually plans to take over only 51% of the company so that the existing (functioning) team of the acquired company remains intact. These steps show maturity and foresight. These explanations by Mr. Marin left me deeply impressed.


You can find more details about the IR call clicking on:

#IRTalk with Frequentis (AT)

Since not living far from the company's headquarters, regularly playing tennis across the street from it and having had this company on my watch list for quite a while, I wanted to take a closer look at Frequentis and its business model. It's a great honour, that Stefan Marin, the Head of Investor Relations at Frequentis took his valuable time to talk to me about important questions that arose after having analyzed the half-year report of 2021 and the annual report of 2020.


Regarding sales development

Revenue growth has been really impressive over the last 20 years. As I understand it, a large part of the growth was based on successful M&A activities, as also shown on investor presentations. Do you think this assessment is correct?
Mr. Marin: Our industry grows at 3 to 5 % annually. We managed to grow 6% or more throughout the last years. Partly, yes, this was influenced by our acquisitions. However, the major part of our growth stems from organic growth.

I gather from your IPO plans that the additional capital raised through the stock exchange should primarily be used for growth investments in the form of M&A activities. The acquisition of the L3Harris spin-off was a hit. Are there specific transaction goals being pursued here? What investment framework are we talking about here in the medium to long term in the planning?
First, I would like to make clear that we do not acquire companies for the sake of revenue growth. We acquire to extend our product offer. I would say that we agree on the target to only acquire companies that contribute 10% to our revenues at maximum. What's more is that we focus on acquiring 51% of the target's shares. We extensively focus on successfully integrating acquired businesses so that we merge the company culture of both companies. This is crucial for us. And one way we make this happen is by keeping the old business as they were so take both sides profit most from this acquisition.

Comment to Mr Marin's answer: This answer deeply impressed me. It is not by any sense usual to have such a strong normative view on strategic questions related to short-term developments for a stock-listed company. Mr Marin clearly states that Frequentis wants to grow steadily and does not focus on short-term issues. One reason for this could be Frequentis' shareholders. With a share of 68%, the owner's family still has decisive control of the company's evolution. 10% of the shares are in the ownership of B&C, probably the most important (stock-investing) foundation in Austria.


According to the annual report 2020, 90% of the customers are regular customers, the current customer portfolio could result in further attractive opportunities for growth: What potential do you see in the existing customer portfolio through cross-selling and price increases organically on the basis of the current figures?

In some contracts we have clauses that say that the prices of our services are tied to an index that should decrease negative affects from inflation. In case of other contracts we renegotiate prices for maintenance to keep price levels attractive. Generally, we do not focus on cross-selling in its purest sense. We concentrate on the tendered projects. Our most successful example of cross-selling has happened in Norway. We started with a project at a volume of 10 EURm for the police. Since then, we have acquired a project volume of 120 EURm for the rescue, fire brigade and sea rescue services. Usually, tenders are offered with many additional services included so that the authorities are not obliged to further tenders as they are expensive. 

Comment to Mr Marin's answer: What a story! From this answer we can learn that organic growth will mainly stem from new project acquisitions.


Despite the low dependence on the economic cycle mentioned in the annual reports, the type and duration of the tender procedure is extremely expensive, lengthy, resource-consuming and jeopardizing success, especially in transactions with the public sector: Are you heavily dependent on public approval and tendering procedures in your operational activities? How long does this decision-making process for the company's products take on average?

Our products are critical for official authorities. There are also laws that tell authorities what regulations they must comply with. These are updated regularly for the public cause. So, authorities do not really have a chance to not comply. Tenders do usually have a range of 2 to 6 years. So, I would not expect us being that dependent from the tender procedure.

Comment to Mr Marin's answer: Clearly shows in which protected situation Frequentis is with its products. Great sign for investors. 



Regarding operating (cash flow) return

The ATM segment has 60% share of sales and is therefore decisive for the profitability of the (entire) company. Due to the high barriers to entry, one could position oneself with particularly high margins. What is the reason behind this business segment performing weakly on profit margins? Are these long-term or short-term circumstances?
Throughout the last years, the ATM segment experienced four acquisitions. We had some extraordinary costs for integration of these new businesses and had an impairment of business value that contributed negatively. The ATM segment's profit margin is not as high as the PST's segment margin. Despite our four acquisitions, we do not plan to increase our revenue share weighting of 60% of the ATM segment.

In contrast, the Public Safety & Transport (PST) division is profitable and has attractive margins (due to 15% EBIT return). What are the long-term plans for the distribution of sales in the future? Are there special investment or acquisition plans in one of the two business areas?
Besides the acquisitions in the ATM segment, we also acquired two businesses for the PST segment. This does not imply any specific focus. We try to keep the revenue shares quite equal and do not want to be dependent from one segment only.

What is the target return for both businesses?
We have a target EBIT margin of 6-8 % for both segments combined.

Comment to Mr Marin's answer: I appreciated Mr Marin's clear answers. EBIT margins of 6-8 % are not high per se, especially in an industry that is protected from competition. Having been in this industry for 60 years, Frequentis knows what's possible in terms of margins. So, I think we have to understand these margins levels in this context.

Although the dependence from economic cycles is classified as low in the annual reports, it can be observed that the return has fluctuated considerably in recent years - especially with regard to the digital (network) solutions on offer. However, I see (A) enormous potential for returns and (B) high margin stability that competitors in the software or SaaS market achieve. In the case of the OCF return, the values ​​fluctuate between 2% in 2018 and 18% in the past financial year. In terms of the free cash flow return, ranges between the slightly negative return in 2018 and the record margin of 17% in the past financial year can be seen. Where do you see the reason for the cyclical operating margins, both in terms of net sales and operating cash flow and free cash flow yields?
We do not define ourselves as software company. We offer hardware which contributes around 10% to our sales, we offer services, maintenance and training. You are true that these numbers vary. This could be caused by prepayments for our services which we have agreed on for specific countries like Venezuela - but, generally, we cannot plan payment streams of customers. Sometimes authorities pay their bills in the fourth quarter having some (excess) budget left. There is no key reason for this. For the last two years, as you've probably seen in the reports, we have had exceptional FCF figures. 

What are the target returns for OCF and FCF if economy and businesses are in normal condition?
We do not have any specific focus on cashflow levels, although they show the truth. We focus on our liquidity with working capital and EBIT margins.
Comment to Mr Marin's answer: Unfortunately, Frequentis does or cannot offer any focus on cashflow levels or margins. This makes us depend on past FCF and OCF margins as a valuation basis.


Regarding Usage of Free Cashflow in the Future

In the 2020 financial year, 0.12% of the share capital was bought back for the first time. The entire authorized capital for the share buyback was thus exhausted. Since your company is perfectly positioned and highly attractive (formerly owner-operated) and, moreover, was previously an owner-operated family business that could multiply its market value through intelligent use of FCF, I wanted to ask you what the company's plans are for FCF in the future to use:
How does the company plan to use your FCF for dividends and share buybacks over the long term?
With the buybacks that we introduced in 2020, we have not used all the resources granted from shareholders for share buybacks. We do have the allowance to repurchase 10% of the issued number of shares. But we do not focus on buybacks. We prefer to use our resources for R&D expenses and attractive acquisition targets.

Comment to Mr Marin's answer: Buybacks of 10% would be insane but I am confident that Frequentis will not utilize them for stock repurchases. Although stock repurchases are an essential criterion for our stock selection, we are conscious that stock repurchases are seldom in the German-speaking area. We have not found out why this is the case. However, we can conclude from the previous answers that the company uses its capital wisely and in a focused manner.

How would you rank the prioritization between M&A, dividends and share buybacks here?
Actually, I would say, you can stay with this ranking. 20 to 30% of our net income should be used for dividend payments and we invest 12-20 EURm in R&D. It's important to not neglect that.

Finally, I would like to mention how excited I am about the fact that the company's Goodwill ratio is so outstandingly low (intangibles ratio of 4% in 2020) and net cash of EUR 77m. These two facts underline great financial policies.
Thank you for these kind words. Customers ask for net cash. They have to face a situation in which they are dependent from us for 20 to 25 years. They ask for 100% reliability of our business. This can be guaranteed with net cash. We plan to stay net cash every year.

Thank you very much for the chance to talk to you and your valuable time talking to me! As you might have seen, I have made lots of notes from the learnings I've experienced from our great conversation.
Sure. Sometimes questions arise, that's no problem. Next time you have questions, do not hesitate to ask me.

Curse or Blessing?

check.markets delivered the first buying signal in this year after headwinds and signals that market participants start to become fearful again through the Russia-Ukraine conflict. The algorithm has also taken note of the recent trends in sectors ranking the Basic Materials sector first.


It was hard to believe. Usually, chart technicians say that if the markets gain in the morning and sell in the evening, this shows a clear sell signal. Although this was the case yesterday, our global check.markets indicator told us to buy this morning which we did. According to our algorithm, we should not have made any investments now for 2 months and 4 days. This time is over now. It tells us to buy the gains again.


Our sector screening showed three sectors that are of particular interest:

  • Basic Materials
  • Consumer Defensive
  • Utilities


It is not surprising for me that constituents of the Basic Materials sector have been trending throughout the recent months. Not only have increasing steel prices helped this sector to gain significant revenue gains, but they have also been supported by strong demand for weapons from the defense industry. Due to the Russian actions against the Ukraine, European countries have finally decided to increase their defense spending by billions. Weapons, aircraft, tanks - they all have some relation to the steel industry. And the strongest spender of this sector is the United States. Germany plans to spend extra €100bn on defense. New aircrafts shall be delivered by an American icon, Lockheed Martin. 





A special day for our Wikifolio!

While several other bigger country indices were suffering heavy losses during the start of the year, we were lucky: We could see our Wikifolio breaking even yesterday!


Here you can see the comparison between TecDAX, the German Tech index, and our Wikifolio named Wonderfolio:


What challenged us at the beginning of the year was our leveraged LONG ETF on NASDAQ 100. It fell so strongly that our whole performance was diminished. With the help of incredible investments like Berkshire Hathaway (BRK.B), we managed to gain heavily since then. The reason for us staying leveraged for such a long time was our global check.markets indicator. It was still long and we followed it. Sometimes it may happen that stock exchanges don't lose everywhere which can be the reason why the traffic lights may light green.


Since then, we made some incredible investments that are (nearly) all green:

  • Check Point Software (CHKP) +15%
  • Alphabet (GOOG) +5.5%
  • Cisco (CSCO) +2.6%
  • Booking.com (PCE1) -6.4%
  • HP Inc (HPQ) +7.6%
  • Meta Platforms (FB) +10.6%
  • United Internet (UTDI.F) +12.3%


Due to volatility, we cared about the risk. One of the most positive factors of our Wikifolio of last year was that we were the least volatile among the global indices. We would like to keep this special feature. So, we invested only 1% of our portfolio in UTDI.F, 1.1% in HPQ and FB. In two wonderful investments, CHKP and GOOG, that specifically take pride in fulfilling all our investment criteria in the best ways possible, we dared to invest more strongly after the release of quarterly or annual figures presented in February.


For our next buying signal, we need to restructure our portfolio to regain our strategic diversification goal. Currently, our portfolio structure looks like that:

Berkshire Hathaway                                        43.0%

Check Point Software                                       8.9%

Alphabet                                                             6.8%

Cisco Systems                                                   5.0%

Booking.com                                                      2.7%

HP Inc                                                                 1.6%

Meta Platforms                                                  1.2%

United Internet                                                   1.1%

Total Sum STOCKS                                         70.2%


MSCI World Information Technology            18.4%

Total Sum ETF                                                   18.4%

Total Sum Cash                                                 11.3%


Our goal is to have a share of

  • 50% in stocks,
  • 20% in ETF and
  • 30% in our leveraged ETF.


This means that we have to redistribute our share positions. Due to the strong performance of Berkshire Hathaway and the guideline to always keep profits growing, we have to find a way to still make use of Berkshire's sensational development but to also keep our strategy.



HPQ - my new favorite?

#HP (HPQ) is one of the biggest surprises in my watch list that I have ever found through my trading algorithm. The reason is that I was surprised at how cheaply the stock is valued, even though it recently hit an all-time high. Below we want to discuss together why this is the case and what is behind HP.


In terms of valuation, we have found a supposedly favorably-valued stock:

  • P/S = 0.6
  • P/E = 5.8
  • P/OCF = 5.3
  • P/FCF = 6.0


All valuation ratios are single digits which means: if you manage to keep the current FCF for 6 years, you could buy up the entire company with the FCF alone. That sounds crazy. We'll get into that later.


For such a low rating, there must usually be reasons in the balance sheet or in the income statement for the low valuation:

  • NI margin = 10.0%
  • OCF margin = 10.8%
  • FCF margin = 9.7%


We see a low double-digit return which has also been at a similar level in recent years. Another crucial reason for low valuations can be found in a company's debt management:

  • D/E ratio = -22.8


And here we may have found the first reason: Currently, #HPQ's equity is valued at -$1.65bn. Financial debt stands at $8.8bn.


Is the company overindebted?

No, we can definitely rule that out. The FCF is $6.32bn, which could pay off all financial debt within 1.3 years. Cash & Equivalents are also at $4.3bn. They would be paid off remaining financial debt within 2.1 years. So we can't talk about over-indebtedness.


So why is equity negative?

We have seen that the company is profitable. The background lies in the company's extremely aggressive shareholder value policy. In 2021, around 20% of the total market capitalization have been returned to shareholders. And since share buybacks are deducted from equity in addition to dividend payments, that's the secret reason for the negative equity. If that was not enough shareholder policy for you, I would like to give you another treat: With an expansive share buyback program between 2015 and the end of 2021, a total of 40.3%(!) of the shares were bought back. That's really incredible. Other stocks like O'Reilly Automotive, Oracle or Autozone are famous for a unique shareholder value maximization. But #HPQ puts them all in the shade with these values.


But in addition to the unique highlights, there are also negative factors that are probably the second reason for the company's low valuation: Investors do not trust the company to maintain current sales and earnings figures. The reason given for this is the corona pandemic. Due to the pandemic, the demand for mobile notebook solutions has increased enormously. As momentum from the pandemic period is said to be over soon, one does not expect that #HPQ will manage to continue to work so strongly and profitably.


As shareholders of this company, we have to savor the extent to which this investor fear can be counteracted by shareholder policy.


In its last quarterly report, the company published that $14.3bn (that's 14%(!) of the current market value) are still approved for share buybacks. So, assuming the company utilizes its full share buyback resources and earnings actually decline, earnings are allowed to decline 14% and still HPQ's EPS ratio would be flat. Isn't that just magic?


After my detailed analysis of the company, I am simply amazed at how expansive and strong HPQ is in its shareholder value maximization. As a check.markets follower, we see the most important foundations in place to buy the first HPQ shares, despite the negative equity.

Meta - a pure cashflow machine

The general situation around Meta should be known; the company is struggling with a decline in users (decrease in daily active users (DAU), to be specific) and increasing regulatory and technical hurdles in order to continue to operate its business model in the old prosperity in the spirit of: data meant money.

After the announcement that it would also withdraw from Europe, the company was to be deprived of its business basis, and Apple's announcement that it would let users determine whether Facebook is allowed to collect data from iPhones (a particularly lucrative target group for advertisers) lead to further losses in its value. After the new guidance for 2022 was presented, investor confidence cracked.

Still, investors in Facebook seem to be forgetting some important side issues that still make the company (fundamentally) a prime investment.

Firstly, there is Facebook's valuation. 2021 was an incredibly successful financial year, which can be seen from the numbers:
  • NI margin = 33.4%
  • OCF margin = 48.9%
  • FCF margin = 33.2%

I currently know hardly any other company in this area that is so unbelievably profitable and produces such high cash flows. The profitability of the business model is astonishing.

Let's take another look at the valuation:
  • P/S = 4.4
  • P/E = 13.3
  • P/OCF = 9.1
  • P/FCF = 13.4

Now it is the case with many tech companies that debt plays a major role. Despite excellent operative returns, companies are building up high levels of debt. The situation is different with Facebook.
  • D/E ratio = 0.11

This means that Facebook has almost 9 times as much equity as it has debt. That's a statement.

Let's assume Facebook achieves another 10% revenue growth (as estimated by Facebook when presenting its Q4 2021 results) and keeps margins stable. The result would be an even more attractive valuation:
  • P/S = 4.0
  • P/E = 12.1
  • P/OCF = 8.2
  • P/FCF = 12.1

As if the current valuation weren't enough incentive to invest, Facebook announced in late October that it would expand its share buyback program by another $50bn. Due to the enormous loss in value, this translates into strong 10% of the company's value. That would improve the earning figures by another 10%, which would push the P/E value down to 10. 

Finally, let's come to important (negative) topics that should be considered in the price and/or would create future potential:

  • I doubt Project Meta. I don't think it has as much market potential as Facebook is currently assuming. Since users would provide a lot more of their own data, it is questionable whether the project will be so well received. On the sales side, however, it will be very interesting. Many capitalization opportunities (purchasing avatar clothing, equipment, home, worlds, as well as placing corporate offerings (purchasing a Gucci shirt for avatar with commission for meta)) open up a world that has been around for some time with the Chinese competitor WeChat operated by Tencent. Based on the text messages entered, offers are loaded in the background, which can then be used with just one click (for ordering a taxi or food, contacting a lawyer,...).
  • Currently, some opportunities in the previous platform environment remain untapped. For example, the existing platforms (especially the Facebook or Instagram Messenger) could be used much more for product offers. In my opinion, companies would love to offer their services this way. The revenue potential for such offerings would create additional revenue potential and would add value that other platforms don't offer.
  • The decline in users is happening mostly in the age group of teenagers and kids. Adults now prefer to use Facebook, while young adults prefer to use Instagram. Platforms like TikTok or Snapchat are digging up a good amount of Facebook users here. Due to the group's bad image, the follow-up question is how Facebook wants to change or supplement its offer in order to attract young users again. And now comes a crucial point for me: Due to the extremely high cash flows that Facebook has at its disposal, it would not be a problem for the company to make interesting acquisitions. It has both, enough cash and enough potential on the financing side, to make the offer massively attractive in one hit. The only question is whether this option will still be used until the meta release 2030.
  • Mark Zuckerberg should step down as CEO. Because of all this upheaval, you will only be able to present Meta Platforms in a new light if you make the people shine on the outside. This is currently not the case. Zuckerberg has a bad reputation and through his numerous lies has gotten himself into a muddle that should lead to the realization that he is handing over the baton to a suitable new CEO in order to get the full potential out of the group for the future.


All in all, I see Meta Platforms in a delicate but exciting situation as hardly any investor currently believes in the future success and upside potential of the Meta brands. The business is far too fast-moving. So the potential for surprises is great. Mark Zuckerberg had proved it before and after the IPO to many investors who didn't believe in his platform. Now the main shareholder is in this tricky situation again. Will he manage to turn the rudder? We do not know it. All we know is that the company could use any penny in the world to start a new revolution. We strongly believe in #FB's ability to use that money intelligently (as in the past). That's the reason why we BUY.

You won't believe it! (BABA)

Alibaba (BABA) is currently in a tough situation. Not only do they face regulatory risk from the Security Exchange Commission (SEC) in America, they also envisage lower customer demand in their local market. These two factors combined with huge political pressure by the Chinese government caused the stock to lose more than 2/3 of its total market cap. This is why I took a close look at the most recent quarterly report from 31 December 2021 to find out more about the current situation of Alibaba.


To start with, I'd like to begin with the most shocking parts that I have learned from the quarterly report:

  • Yes, Alibaba really faces weak demand in its most important revenue segment China retail commerce.
  • Alibaba has huge profitability problems with its segments; only the China retail commerce and the cloud segment are profitable; all others are loss-making.
  • Alibaba finally starts to seize its free cash-flow for the shareholder's good: several billion dollars are planned for stock repurchases. Only problem: FCF decreases vastly!


Where does Alibaba's revenue come from?

I really hoped to learn something great from this report and was shocked to see more and more trouble coming around the further I continued reading. When you read this report, you get to know that every(!) segment is growing except of one: China retail commerce. Sales fell by 1% YOY. This does not seem much to the ordinary investor. It's disastrous. Not only for the reason that it is the most important segment with a revenue share of 41% but also because of its profitability margin that decreases. Let's have a look at Alibaba's revenue shares:

Segment name

Share

(in %)

YOY growth

(in %)

Customer management41-1
Direct Sales and Others28+21
China Commerce Retail69
China Commerce Wholesale2+10
Total China Commerce71



International Commerce Retail514
International Commerce Wholesale229
Total International Commerce7



Local Consumer Services527
Cainiao515
Cloud820
Digital Media & Entertainment30
Innovation Initiatives163
Total Others22


We see a clear revenue concentration in the Chinese commerce segment with a revenue share of 71%. Alibaba has not yet managed to have an international footprint. Its international operations with Alibaba Express only contribute 7% to its sales. We can also learn from this table that the Cloud segment that Amazon analysts especially dissect in every way possible does not have strong influence on Alibaba's success yet.


Which segments are profitable?

Having learnt from these numbers, we would now like to check Alibaba's business units. Alibaba publishes the results of its business segments on EBITA basis. Amortisation is considered while taxes, interest expenses and depreciation are disregarded in these numbers.

Segment name

EBITA margin

31 Dec 2021

China Commercepositive
International Commercenegative
Local consumer servicenegative
Cainiaonegative
Cloud

positive

Digital media & entertainmentnegative
Innovationnegative
Unlocatednegative


Wow! Can you believe this? 2 in 8 segments are profitable. The rest of the business segments are all loss-making. How does Alibaba still manage to stay profitable? It's the China Commerce segment that makes money. To ensure strong business development it will be important for Alibaba

  • to focus on business incentives for Chinese customers to buy more and at higher prices and
  • to invest in further growth campaigns for its cloud services, while
  • making sure to check every business segment thoroughly in order to become profitable (or sell/discontinue it)


It's important to add here that 2020, a very successful year, had exactly the same issues excluding the sales difficulties that Alibaba currently faces on the Chinese market.


Why has Alibaba's market value sunk so much since Russia invaded the Ukraine?

Another tough factor influencing Alibaba's operational development will be the political strategy of the People's Republic of China. If China loses its support from Western countries, Alibaba will have major sales problems. China publicly supported Russia's invasion of the Ukraine which is a troubling (political) orientation for a prosperous future of Chinese people that Alibaba most heavily depends on.

Since Alibaba publicly announced its plans to list Ant Financial in America, they are confronted with strong headwind from the Chinese government. What's more are Jack Ma's attacks against the condition of Chinese banks. His commentary immediately brought the firm into heavy trouble leading Ma to resign and to step back. These issues are not yet solved. Alibaba still has to fear the Government. 

Additionally, China started fights with the American SEC about the accounting principle standards for Chinese companies in America. While the SEC plans to force Chinese stock-listed companies to account on the basis of IFRS and international accounting standards, China's government strongly argues against these plans. Some days ago, we learnt that both parties are close to a deal which will take pressure from Chinese companies that are listed on American stock exchanges.


Is Alibaba's market valuation fair then?

Due to the uncertainty about the ongoing war between Russia and the Ukraine and China's positioning supplemented by Alibaba's tensions with the Chinese government and its strong headwind on the Chinese market we've probably not seen the end of the correction although it would not be a miracle to find a rebound soon.

Some valuation figures look great (market cap as of today, balance sheet data from AR 2021, rest as of TTM):

  • D/E ratio = 0.17
  • P/S = 1.7
  • P/B = 1,3
  • P/OCF = 8,1
  • P/FCF = 9,2

Even if we took all these factors into account and would go for a stress test (doubling all numbers), we would still be in the range of regular growth companies.


Is there anything that speaks for Alibaba?

Yes, there is. Warren Buffett's closest business friend from Berkshire Hathaway, Charlie Munger, buys Alibaba heavily. Other value (hedge fund) and retail investors count on Alibaba's comeback. So, the company has not lost its institutional support completely. What hinders many institutionals from buying the stock are the juridicial issues that also stock analysts mention in order to justify Alibaba's valuation.


Should I buy now?

Let's be clear on one important thing that we have to add here: Seeing the current situation from the long-term perspective, it is probable that Alibaba will play an important role in China's future within the next 10 years. With its international marketing and sales campaigns, Alibaba tries to conquer further markets in foreign countries. Their customer base of

  • 979 million consumers in China (76,5%) and 
  • 301 million consumers overseas (24,5%), 

leads us to our view to see Alibaba as a company profiting from great network effects serving more than 1.2bn customers worldwide. With such an incredible customer base, we see this company in a good position to (out)perform long-term. But for the short-term we see this stock riding on a rollercoaster. 

We will (privately) buy a small slice.

How to find 100 baggers (stocks that make $100 from $1 invested)

In his book "100 Baggers: Stocks that Return 100-to-1 and How to Find Them" (2014),  Christopher Mayer analyzes the basic components that stocks had to become 100 baggers. The author tries to give us basic guidelines which to respect when you want to find stocks as such. 100 baggers are stocks that turn $1 invested into $100. With this post we try to summarize the author's findings and show you how much the check.markets strategy has in common with it.

Let's list the components that Mr Mayer finds well in his book being most common of 100 baggers:
  • The stock should be run by the owner ("owner operator") or should have a high ownership of insiders.
  • The stock should ideally by fuelled by a twin engine (growth in sales and earnings and growth of multiples).
  • Many 100 baggers experienced high ratios of stock buybacks over the years.
  • Follow the coffee can portfolio strategy. This strategy says to buy stocks and keep it in your portfolio for 10 years at least. Afterwards, the investor can analyze where his stocks have gone.
  • To make most out of the coffee can strategy, it's most important to (1) know your business and the factors that influence it (car manufacturers are highly dependent on semiconductor chips, commodities for car parts and expansion of train and publicly usable routes with other means of transport to name just a few drivers), (2) make careful study of the underlying business in order to only buy the best ideas and (3) take into consideration that - following quotes from Charlie Munger - business with margins of 6% will stay with this margin in the long term. Consequently, stocks with net margins of 20% will continue to make 20% on average. The reason why this consideration is so important is that the multiples will decrease by this percentage (earnings, sales, book value, cashflow) in the following years. 
  • As mentioned before, investors need strong filters to only get hold of the best investing ideas out there. In order to have 100 baggers in one's portfolio that you can really see on your accounting balance, it is important to invest in 5-6 stocks only. The more you diversify, the more you dilute the performance of your investing ideas. 
  • Moats guarantee consistent above-average margins. Moats are well-known since Warren Buffett introduced them as an investing reason and Pat Dorsey published his book on this topic. Moats empower a company to offer products at such a low price that no competitor has any chance to follow (Wal-Mart). But moats can also mean that companies offer their products at such high price levels and still won't lose any customer because they increase the customer's status in his environment (Tiffany's, Ferrari). If you saw these products from a rational point of view, you will never get the money back that you invested for those products because they are worth less. The brand name on this product is the key reason for the high price, not the product itself. That's what moats can do.
  • Dilution is a big enemy. Stocks that buy back shares each year decrease the number of stocks available. If you own 10 shares of a stock that has 100 shares available and this company buys back 20, there are 80 shares in total of which still own 10. In the past year, you had 10% ownership of the stock. Thanks to share buybacks, you now own 12.5%. 
  • Don't trust or follow analysts, forecasts or macro economic indicators. The reason being is that analysts are indirectly constrained by the company they analyze. In order to gain more inside information on a stock, analysts mostly talk to company officials. If analysts then publish research that shows how bad the situation of this certain company is or how badly it is run, you can be sure this will be the last time this analyst gained detailed information from this company. Analysts have to make some stakeholder management, too. It is most obvious that the good dealership with company officials belongs to the most important necessities in this job. Besides this factor, there is another key factor influencing the accuracy of an analyst's work: prediction. Nobody knows the future, also analysts don't. If you compare the historic predictions with reality, you will see that forecasts are too optimistic on average. What's more to it: Have you ever heard of a study that could predict war, heavy rises inflation or other extremes? That's the problem. If you totally rely on the estimates of analysts or macroeconomists, you won't experience high returns in your portfolio. 
  • Experienced investors don't care so much about earnings, they are looking for cashflow figures. Every CEO in this world has a certain toolset. It is the same for every company leader. The first category of toolset is the operating toolset. CEOs take initiatives to decrease costs by (a) cutting personnel costs, (b) improve company structure for efficiency reasons, (c) reduce purchase or input cost or change companies you buy parts/products from (bad comparison, but I have to make it: the same strategy is used for maximizing profits for drug sales) and (d) remove all unnecessary expenses (in the film "House of Gucci" you can see how much corporate money was wasted for private or status-backing purchases by Maurizio Gucci). The second toolset is free cashflow. With free cash-flow you can do four things: (a) repay debt, (b) make mergers or acquisitions, (c) make company investments or you can (d) buy back stock. The best CEOs are the ones that know how to use their toolset best for the very situation that the company is in. CEOs can only use every tool that I described above if there is enough cash that is generated by the business. Mr Mayer found out that it's not the most innovative idea, a certain industry or a certain macroeconomic environment that formed 100 baggers. It's the perfect capital allocation done by CEOs. Capital can only be allocated if enough cash is at the CEO's disposal

And this is it. These are the major takeaways that Christopher W. Mayer showed up in his book. Especially the chapter that deals with the toolkit of CEOs inspired me. It's great to be able to know the full collection of initiatives that CEOs can use for or against a company. 

How does this guideline comply with check.enterprises?

I am happy to share that the strategy or the prerequisites listed in this book comply with check.enterprises to a very high degree. Let's get more specifically:
check.markets goes for companies that
  • are lowly-indebted (if not debt-free),
  • generate vast amounts of cash (and have high margins),
  • use their FCF to for stock buybacks and or dividends (dividend + buybacks = adj dividend),
  • have high and consistent profit margins,
  • lead their sector and industry and
  • reach their all-time-high (ATH)


What divides us from the guidelines from 100 baggers is that 

  • check.markets is interested in the market prices as an indicator for the robustness and strength of markets (and trends)
  • check.markets does not like low performers. The algorithm currently tries to only invest in promising upward trends that can halt but should turn.
  • check.markets does not yet regard the twin engine that much as it concentrates on the fundamentals and the current market prices.


After the next buying signal from check.markets, we will see how promising the new ATH candidates are. By now, we feel to follow the right strategy. While markets YTD have performed this way:

  • S&P 500 (-12,7%)
  • Nasdaq 100 (-19.9%)
  • DAX (-13.7%)
  • EuroStoxx50 (-14.0%),

check.markets Wonderfolio managed to decrease only by -4.6%. (https://www.wikifolio.com/de/at/meine-wikifolios/trade/wf00wonder)


Although you can never be proud of producing negative returns, we are proud to trust companies that investors don't punish as hard as others. The secret may be split in two reasons:

We have invested in companies that don't or hardly have any connection to Russia or Eastern Europe

We have invested in companies that are not at all debt-sensitive. Our investments have debt/equity ratios below 0.1 and can pay them off within 1 year. 

So, all in all, you can see that we engaged a lot with our investments to now be in the position to experience quiet nights. Other investors currently suffer from tough times. We do so too sometimes. But by adapting to the macroeconomic extremes (interest rate changes, Russian war), we do our best to position ourselves best to own a low volatile but growing portfolio.


We will test how much we could use this book to lever our results. We are confident that our strict filters help us to profit from similar returns in the future. Time is key. And we give our algorithm this time to evolve.


Watchlist entry 3: 1&1 Drillisch (1U1.F)


Two other reasons that we currently see as reasons are
  • the (current) low growth in sales and earnings and
  • the high capital expenditures for the construction of the 5G network, which are to be covered by operating income.
1&1 Drillisch is at 75% owned by United Internet, which in turn is managed by Ralf Dommermuth. As a result, the pressure for short-term earnings delivery or generous distributions is rather low. Especially at a time when United Internet wants to list the Ionos business on the stock exchange, the short-term revenue prospects for United Internet are more likely to lie with the IPO of the cloud subsidiary.

Excitingly, under the "Equity Story" item the number one focus on United Internet's Investor Relations page is the construction of the 5G network, which in turn is being provided by 1&1 Drillisch. In addition to the rather exclusive position as European cloud business Ionos' business area is considered a cornerstone in the future orientation of United Internet.

The sad disadvantage of this: The 5G network is a project that will not be completed by 2030. Not because of 1&1, but because of the federal authority and the competitors. In the blog post I already mentioned that Deutsche Telekom is said to have already intervened in the construction of the 5G network and is also said to be demanding access to the 1&1 Drillisch network. In addition, lengthy negotiations with the authorities are to be expected (until) 2023. Accordingly, it can and will take years before these great efforts are (positively) visible in the business figures.

As a result, there is a double-edged opportunity right now:

  • either those who grab the knife and see the hoped-for success on the telecom market dry up or
  • that of making a long-term investment in a highly attractive company that can be presented as a model company both in terms of valuation and financial policy.

I would like to use this key figure excerpt (from the MRQ) to explain why I find the company very attractively valued:

  • P/S: 0.9
  • PBV: 0.7
  • P/OCF: 11.9 (as of 2020: 7.9)
  • P/FCF: 13.9
  • OCF margin: 7.7%
  • FCF margin: 6.8%
  • NI margin: 7.3%
  • D/E ratio: 0.02
From these figures we interpret the following situation: We see an (almost) debt-free company that can handle all long-term investments from the operative business and still delivers attractive ongoing profitability KPIs.

In the short term, the valuation is probably somewhere between cheap and fair, but we see great potential in the business in the long term. This will probably only be recognized when the new guidance for the business situation after 2030 has been published. These will probably be held back until 2023. But from this point on, a complete revaluation scenario emerges in which we are convinced that 1&1 Drillisch will present highly attractive guidance figures.

At prices below EUR 20, we are positioned with a first (small) tranche of around 1%.

Watchlist entry 2: Intel Corp. (INTC)

Another highly attractive value, which unfortunately will not show much growth in the short, medium or long term, is #Intel.

Intel finds itself strategically in a crucial situation. If Intel manages to regain market leadership from behind the scenes, the current market valuation would probably lead to a run on the stock. Unfortunately, the short and medium-term situation is that Intel and its products can hardly keep up with the competition.

On the other hand, a spin-off of a former acquisition target should make good headlines: Mobileye. With a revenue share of around 1% but a valuation potential of around $50bn (25% of Intel's total value), Intel would create a highly attractive situation for investors. The money raised can be used for the following things
  • debt reduction
  • dividend payments
  • standard strategic investments
  • share buybacks
The extensive buyback of shares would appeal to us in particular, because that puts even more pressure on the company's valuation. In the past, Intel has partly used the high cash flows for this: Between 2015 and 2021, 16.8% of the shares were bought back. This corresponds to an annual average of 2.7% adj dividend yield. According to Intel, around $7.2bn is left from the current buyback program from 2005, which is around 3.6% of the company's value.

With the company looking to implement massive investment projects in the US and Europe, the potential for shareholder value maximization in the short to medium term is not big. At the same time, these initiatives and investments should boost growth and lead the veteran CEO Gelsinger back to old heights. Currently, Intel's valuation metrics look like this:

Market capitalization$193.4bnP/S ratio2.4
Revenues '21
$79.0bnP/E ratio9.7
Net Income '21$19.9bnP/B ratio2.0
Equity '21$95.4bnD/E ratio40.4%
Financial Debt '21$38.6bn
OCF$30.0bnP/OCF ratio6.4
FCF$9.7bnP/FCF ratio
20.0
OCF margin38.0%

FCF margin12.2%

NI margin25.1%

No Shares '154.9bn

No Shares '214.1bn

Chg No Shares '15-'21-16.4%Avg Chg No Shares-2.7%

We conclude from these numbers that

  • Intel could repay the entire financial debt within just under 4 years (FCF was almost twice as high in 2020 and the years before)
  • Intel can boast insanely high margins, making it an attractive candidate for shareholder value maximization tools
  • Intel regularly buys back shares and has done so at an average of 2.7% per year for the past 6 years
  • Intel's growth indicators continue to be valued favorably, even if the upside potential is currently rather low.
 

We would prefer prices below EUR 40, which we have already seen twice this year. We would also dare to buy at these prices.

Watchlist entry 1: Paypal (PYPL)

The payment provider #Paypal is now also on our watch list. A purchase could also be made here during the day.

The company has been growing steadily for years, but has disappointed Wall Street with its recently released FY2022 guidance, although it would put revenue growth at around 14% and net income growth at a strong 31%.

In terms of valuation, Paypal remains relatively highly valued, although it has already lost around 2/3 of its market value.

An example list of some rating indicators below:

  • KUV22 = 3.8
  • P/E22 = 20.2
  • KBV21 = 5.1
  • KCV21 = 17.4
  • KFCV21 = 20.4
  • D/E ratio = 0.4
  • OCF margin 21 = 24.8%
  • FCF margin 21 = 21.2%
  • NI margin 22 = 21.4%
The key figures show that the valuation figures are still very high. With its high FCF, Paypal can fully pay off its financial debts within just 1.5 years. When looking at the profitability of the business, however, PayPal stands out: With such high cash flow and net profit margins, PayPal is proving to be a very attractive player in its financial services industry. Because of the help of strong growth and profitability indicators, the valuation quickly decreases each year or justifies the high profitability of the operating business.

When we invest in Paypal, we only invest in a small (trial) tranche to cushion possible further escapades in the Russia-Ukraine conflict. Maybe there will be even more attractive courses ahead of us. Thanks to its great market position and the impeccable reputation of the brand, the company has gained a high profile and popularity. I also use Paypal and am an enthusiastic customer.

Next buy in our Wikifolio: UTDI

The current valuation of United Internet and its subsidiary 1&1 Drillisch is currently so attractive that I almost feel compelled to make this purchase.

United Internet plans to list its cloud infrastructure subsidiary Ionos on the stock market. It is said to be a hyperscaler that will later have to compete with Amazon Web Services and Google Cloud as well as Microsoft OneDrive. In view of the EU plans to savvy European cloud providers, Ionos is creating an interesting offer here, which should also be treated well in terms of stock market valuation.

With a price-to-sales ratio of 0.92, a price book ratio of 1.1 and a P/OCF multiple of 5.5 and a (stable) P/FC ratio of 10.9 and the corresponding growth prospects, we are convinced that the company will develop positively.
Ralph Dommermuth is the company's founder and CEO and has proven his standing as a successful entrepreneur for years. He holds company shares of around 51%.

We trust in him to lead this company in a prosperous future in the long-term. We invest around 1% of our portfolio value in the shares of United Internet.

#IRTalk with 1&1 (GER)

Today, I've had another phone call with the Head of Investor Relations at 1&1 Oliver Keil. I've gotten to know a very experienced and focused man that seemed to know the company and the current situation of it very precisely. This has probably been the most professional Head of IR that I've talked to so far. He spoke his words clearly and emotionless. No room for bullshit or exaggeration. Unfortunately, the (legal) requirements behind his role challenged me to get the insights I wished for in my mail. Please read my mail to 1&1 and then check the answers I have summarized under the questions that I highlighted. For each question, you can find my comments beneath Mr Keil's answer.

Dear Sir or Madam,

I don't quite get 1&1 AG out of my head because of their really great current stock market valuation.
For this reason, I studied the Annual Report 2020 to learn more about business segments, risks and corporate plans.

I came across the following issues that I would like to discuss with you:
Now that the company is delivering stable double-digit operating (2021: 12%, 2020: 10%) and future high free cash flow percentage margins (2021: 6%, 2020: 10%), the question arises for me how you plan to maximize shareholder value. The 2020 annual report says on page 56, "The company is authorized until January 11, 2023 to acquire treasury shares in the company up to a total of 10 percent [...]." Based on the development of the number of shares, it is not apparent to me that there were actually extensive share buyback programs in the near past, although these seem suitable for the weak price development in order to spark more euphoria for the share again. Furthermore, due to the high investment requirements of the coming years, the dividend will be kept low.

What steps can shareholders expect over the next 3 years to what extent free cash flow is used to maximize shareholder returns? Will the approved 10% share buyback rate actually be used for share buybacks until 2023?
Mr. K: It is very unlikely that we use it. You normally buy back stocks if you do not know how to use your cash or in case you are undervalued. This is not the case with us, we want exactly what our plan is. Since we follow our big plan to build our own mobile networks, we do have plans how to use our cash for sustainable investments. 

Comment to Mr. K's reply:
Very sad story although I fully understand the company. To not get into any debt, the company tries to you all its operating cashflow for the sake of its investments.

The external conditions are very challenging in many respects. Nevertheless, this company can hardly take advantage of the increasing focus on working from home. On the profit side, too, hardly any increases are to be expected due to the high operating expenses associated with the construction of the mobile communications network. With which sales growth plans and strategies does 1&1 currently want to ensure more growth? Since the takeover of United Internet, the company has been transformed from a growth tycoon into a telecommunications group with growth rates à la Deutsche Telekom.
Mr. K: I cannot give you any answer on that question as it is related to our plans to position this company as a mobile network operator as well. We're not Rakuten from Japan. They released their exact plans where they would like to expand. This was the worst thing they could do as their competition immediately knew where to invest in order to seize the chances that Rakuten saw in certain regions or product lines. As long as we haven't published any figures on Capital Market Days, I'm sorry, I will not be able to answer any questions in this direction.

Comment to Mr. K's reply:
This is indeed another sad story. On my subsequent question if investors could see this Capital Markets Day coming within 1 or 2 years, he added that there will not be any forecasts or guidance as long as the contractual arrangements are not signed (and they will probably be signed by 2023 earliest. In recent talks, Deutsche Telekom should have said that they need access to the mobile network although not being owned by them. Neither the prices nor the exact arrangements can yet be forecasted. I was very surprised but also very happy to experience such a conservative corporate policy on such urgent and important issues. 

Does the company plan to continue its excellent financial policy with a focus on almost full equity financing or is this just a short-term phenomenon? Is there a specific planning key figure here as to how high the equity share should be in the future?
Mr. K: (laughs) Well, if it was possible, we would of course strive for 110% equity ratios. This is not possible. But as you can see in our reports, we have also been trying to finance any expense with our capital earned from revenues. You can be sure this should continue to be our plan, also for the future.

Comment on Mr. K's reply:
These words speak for themselves. Very conservative and professional answer and management. I highly appreciated this attitude throughout our complete interview. On one question he added that Mr. Dommermuth (CEO of United Internet and majority stockholder of 1&1 AG with around 76% company ownership) is not interested in any short-term goals and KPIs. He would know that many (especially) institutional investors are obliged to deliver returns within 3 years for insurances or family investors. But for investors as such, this is the wrong company. With 1&1, there is only long-term focus. After this interview, I can't see any reason why I would disagree with this view of Mr. K.

Investments in the new 5G business segment are massive. For me as an investor, these could become attractive from 2030 onwards. What sales, earnings and cash flow effects can an investor expect from these investments in a kind of before/after comparison? Here is a fictitious example of which KPIs I could imagine for such planning:

                                        KPI 2020-2030      from 2030
  • Sales growth                 2%                  5-7%
  • Return on sales             8%                    12%
  • OCF margin                  10%                   15%
  • FCF Margin                     8%                   10%


Mr. K: As I said, I cannot give you any guidance for this scenario as long as they are not officially published during Capital Market Days. But you can immediately get to know the figures right then if you subscribe to our IR newsletter. As we do not offer any guidance or forecasts we experience a valuation discount. And as long as we don't offer any, investors won't appreciate that. What investors need is transparency. We can't offer any on our forecasts currently. For our application to become a mobile network operator we had to hand in business plans which we naturally did. But we cannot and do not want to disclose them.


Comment on Mr. K's reply:

Nothing to add here. He made it clear from the beginning that he will legally not have the chance to answer my questions. He would try to give me some hints - which he did.


So, what's my conclusion?

It's tough what to conclude here. The company is in an excellent position to perform strongly within the next 20 years. The only problem is that it cannot offer any reliable guidance. Due to its conservative IR policy it also doesn't answer any statements to questions which they cannot answer based on facts due to the contractual negotiations which will have to finish beforehand. With its high equity ratio, its strong cash flow ratios and its market position as a discounter, I see this company in a good position to be a formidable value investment. Although not every contract and every external negative factor in its plans to take part as a mobile network operator is yet finalized, we are optimistic that the German state will take effort to welcome another mobile network operator for higher competition and less market concentration in Germany. 


Commodity price increases are no reason for interest hikes!

Today, Jerome Powell, Federal Governor of the US Federal Reserve Bank, published a statement saying that the Fed needs to increase its interest rate by 25 basis points in March and further interest hikes are regarded necessary, too. There are two things that Mr. Powell doesn't regard here.


Commodity prices seem to climb to further highs every day

Mr. Powell is in an unlucky position. Although inflation skyrockets, the Fed hasn't yet increased its interest rates. During summertime, the Governor was of the opinion that these price increases are temporary and transitory. In my view, he is in big parts right about that. Which components make the inflation probably rise most? It's the commodities. I'll give you examples of how much they increased throughout the last year as of 3 March 2022:

  • UK Gas: +322.1%* (*6M)
  • Brent oil: +110.1%
  • Diesel: +108.5%
  • Soya oil: +75.9%
  • Wheat: +73.9%
  • Coffee: +63.1%
  • Corn: +55.0%
  • Soy beans: +42.6%
  • Cotton: +42.5%
  • Pig: +33.5%
  • Sugar: +25.8%
  • Gold: +12.5%
  • Palladium: 17.1%

Many of these commodities are used and needed every day: gas, oil, wheat, corn, cotton, sugar. And the prices of agricultural commodities directly affect the prices of meat as it's more costy to feed the cattle. So what we see here is an intense price growth in everyday living commodities leading to an outburst of inflation rates. What needs to be added here is that the prices for agricultural products should further increase due to the conflict between Russia and Ukraine since Ukraine and Russia are both heavy exporters of agricultural products.


Shortage shouldn't prove to be a long-term inflation factor

Another key factor driving prices is shortage. The chip shortage affects various sectors and industries. One sector that is especially affected by this shortage is car manufacturers. This led to incredible price increases in the used car industry. As reported in a previous post, the price increase of used cars was higher than 40% in 2021! As new cars can't be delivered on time, customers search for attractive used cars. This also has a major effect on the turnover success of automobile producers. New cars can neither be delivered nor sold. In the worst case scenario, this could develop a midterm issue of manufacturers fighting high inventory. 

Many tech companies, especially hardware sellers, share the same problem. Delivery issues as well as production problems lead to delivery delays and customer dissatisfaction. Semiconductor companies like Intel or TSMC go into the offensive. They each invest tens of billions of dollars on various production facilities to stop these delivery problems in the midterm. Intel does very wise on that positioning itself as a middleman being more business cycle sensitive but also much more influential. They basically copy TSMC's concept of producing chips for third parties but, additionally, develop their own chips as well. 

This shortage crises drives another sector crazy as well. Global liner shippers like Hapag Lloyd or Maersk experience sales growth rates that haven't ever seemed possible. Due to incredibly high demand for fast and reliable delivery retailers and manufacturers pay container prices that haven't been seen before. Hapag Lloyd had a sales increase of 74.6% to $22.3bn. With Maersk, one of the global leaders in this industry, it was a revenue increase of 49.6%.

Long story short: You can see that the current market dynamic is not usual. But we agree with Mr. Powell that this price movement is transitory. 

Mr. Powell also stated that not only directly affected goods have experienced price increases but also other everyday products have seen price increases. This surely will be the case, no doubt. But is the main pricing pressure really coming from these "other" everyday products? I don't think so. Some commentators like Markus Koch (from Opening Bell) think that there are many institutionals out there strongly doubting that the Fed actions will prove to be a success. They are of the opinion that the Fed will be too strict and too fast with its actions. 


The Bottom line

We share these investors' opinion. We are not convinced that inflation can be decreased by raising interest rates to levels of 1.5% or 2%. This move could be prove to be a disaster regarding the capital needs of growth companies in modern sectors.

Yes, we are pro interest rate hikes - but they should be implemented in a mid- and long-term timeframe. The Fed should act carefully like it has always done in Powell's era. Any over-reaction on the one side can lead to an over-reaction on the other.