We move inexorably towards spring and whilst the natural world cycles its way through seasons year after year, the corporate world faces a supply and demand shock which accelerates organisational Darwinism. Which companies will survive this storm? Can they ride out the waves of the pandemic or will they lose steerage way, only to broach to and sink without trace? As with the natural world, the brightest future rests for those companies who can adapt fast, show leadership and purpose, and demonstrate empathy and responsibility to all stakeholders.
This month’s stock story belongs to a German company, founded 125 years ago in 1896 near Stuttgart. A 24-year-old called Paul Dürr decided to start a metal shop for roof flashing. Over the next century, this family of tinsmiths faced the ravages of inflation during the Weimar Republic and then its darker aftermath, only to emerge from the 1940’s at the vanguard of plant engineering. Evolution has always been in the DNA of www.durr-group.com and it entered the 1960’s by expanding into the car industry, where it retains to this day a leading position in paint shops. Dürr further evolved from dip coating to robotic painting, acquiring the measuring technology group Schenk. There have been existential crises over the years and the millennium saw the group facing financial difficulties, but under new leadership from Ralf Dieter in 2005, a plan to optimise and invest came to fruition. I was a shareholder in 2014 when the announcement was made to buy Homag, the global number one in woodworking machinery. We scratched our collective heads as this behemoth in the auto industry shifted from steel applications to wood. But, after some fine tuning, the wood business has thrived, and its largest customer’s yellow name on a blue background means that many of us, though unwittingly, are customers of Homag.
Things haven’t always been easy and Ralf Dieter will be the first to admit to the challenges in Dürr’s competitive market place. So why do we like the name? We like how Durr invests alongside its client partners following its customers around the world with its 17,000 employees working at 120 sites in 33 countries, giving the group a leading position in its markets. Dürr holds leadership positions in around 95% of its product portfolio, where barriers to entry are typically high. Market shares range from 20-50%. Above 40% of new business is coming from emerging markets where demand is typically higher and management target 30% of sales to come from recurring revenues from service contracts. As the order book grows, the improved asset light business model targets a return of 25% on invested capital which in our opinion often goes hand in hand with strong share price performance. We see two drivers to this outcome in the short term. Homag is becoming increasingly involved in the prefab housing market – viewers of Grand Designs may remember the astonishing feat of the German team who transported the wooden framed Huff house and built it in a forest clearing in the blink of an eye. In addition, Dürr is becoming more and more involved in digital applications for its divisions and is expanding its data based intelligent products and services. This will open up new market places as well as shield the group from competition.
Strong management and clear purpose have steered Dürr through choppy times before, and the current situation is no different. 55% of group sales come from the auto industry which is going through a major transformation, adding to the decline in demand from COVID. This is a cyclical business and it relies on the relative health of other players in the ecosystem. It is starting to report more transparently on its emissions and its social performance which we encourage. Here too, Dürr has ambitious plans to be a leader in the field of play. One thing is for sure; no business in modern times can sit still. The constant need to innovate and decipher future trends will mean the difference between winners and losers. This applies to companies in every sector whether they be metal bashers or food producers. Product cycles get shorter, and the time to harvest is even briefer than before. Adapt or decline. There’s a photo of a young Paul Dürr on the company website. I suspect he’d be tempted to give his whiskers a quick twirl if he could only see how far the business has come in one and a quarter century. As long-term investors, we’re intrigued to see how Dürr does over the next 25 years.
Written by Rory Hammerson
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