Hence, our main task is to select businesses capable of profit growth over time, which—sooner or later—is reflected in the company’s valuation.
COVID has had a disparate impact on sectors and as such, 2020 was a great year for many of our companies, though not so for others. The latter group, hit harder by the economic slowdown triggered by the health crisis, has been forced to focus its energy on optimising processes and cost structures in order to cushion the effects of falling sales. Nevertheless, we are confident that all of these companies will remerge stronger from the current situation.
Generally speaking, our funds’ companies produced very good results, often exceeding market expectations. This was only possible because, in most cases, these companies are industry leaders, operating in growth markets, with clear competitive advantages. Additional elements helping these companies weather a difficult year with solvency include healthy balance sheets (minimal debt), scalability, and an exceptional capacity to generate cash flow.
Included among the sectors least affected by the pandemic with accelerated market growth is logistics. Companies like DSV, Deutsche Post, and Logista experienced a spike in global demand in 2020, driven by an uptick in ecommerce in all areas. All three companies reported better-than-expected profit and cash flow figures, enabling them to increase shareholder remuneration (whether through dividends or buybacks). The outlook for 2021 remains very favourable.
Another sector benefitting from the difficult pandemic environment is the digital/tech universe. American companies like Nvidia and Amazon, and European companies like Dassault Systémes, ASML, and Philips closed the year with high profit growth. All hold considerable market share in sectors with structural growth, accelerated by the pandemic’s effects on consumer habits, and all have contributed in a major way to the favourable performance of the portfolios in the last year.
The industrial sector, comprised of a varied and diverse group of companies, has tremendous weight in the portfolio (particularly the Spanish portfolio). It includes Fluidra, a global leader in swimming pool maintenance, which had an extraordinary 2020. The company benefited from mobility restrictions and the ‘cocooning’ effect of staying at home. The company has used its strong cash flow to reduce debt, remunerate shareholders (through dividends), and make some minor acquisitions. Its prospects for 2021 remain very positive.
We also saw good results for our two companies in the automotive sector. In 2020, the production of light vehicles fell by 14.4 million units, representing a 16% drop. In this difficult environment, Gestamp was able to generate free cash flow equal to 11% of its market capitalisation, in an effort to deleverage its balance sheet. Today we have a company with more optimised processes and structures that is also a more financially sound asset. Cie Automotive, meanwhile, closed the last quarter with an operating margin that exceeded pre-pandemic levels, with elevated operating cash generation. With their outstanding management, efficient use of capital, and good prospects for the current year, both companies will emerge stronger from the pandemic.
In Europe, Kion—a global leader in warehouse automation and rolling stock, sectors that benefitted greatly from the 2020 logistics boom—closed the year better than expected, and with more ambitious guidances and prospects for 2021, reflecting the company’s long-term potential in this environment of digital acceleration and increased logistical needs worldwide.
In the long term, we expect our selection of companies will continue to obtain high profit growth (≈10% at an annualised rate). In 2021, we expect the profits of those companies that declined due to the impact of the pandemic will rebound with equal intensity. The magnitude is not easy to quantify given persistent uncertainty and high volatility in the short term. This year will be defined by the vaccination rate, the potential emergence of new strains, and the gradual opening and normalisation of markets and the movement of people. As the economy normalises, we will see quality companies grow once again.
EDM funds distinguish themselves with balanced portfolios and a flexible approach. The portfolios invest in a range of top quality companies with good fundamentals and exposure to global markets, which should yield good returns on capital, even in the current environment of uncertainty and volatility. Despite the stock market rebound in the first quarter of the year, we believe that company valuations remain very attractive, trading at multiples that are still below their historical average.