German Stocks: Hidden Champions

"The German Mittelstand stands for innovation and excellence and is a role model worldwide"

– Wolfgang Schäuble, former Minister of Finance

arvy's teaser: As Euro 2024 kicks off, Germany's true champion shines: its Mittelstand. Home to 1,573 "Hidden Champions," Germany leads the world in market-leading, innovation-driven small and medium-sized enterprises.

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Germany.

Our beloved neighbor and host of the Euro 2024, which starts today.

With tonight’s kick-off, we will be eagerly awaiting the new champion. What is clear, however, is that Germany already has won a trophy. A big one. The country is the champion when it comes to being a market leader, as it has the largest number of small and medium-sized market-leading companies. Worldwide (chart 1).

Yes, you read that right. When it comes to being a champion in its respective field, no one, and I mean no one, comes close to the German Mittelstand.

We are talking about companies that are among the top three in their field in terms of market share and have a low level of public awareness.

They have a suitable name.

Hidden Champions.

Chart 1: Where are the world’s Hidden Champions? And How Many?

Source: “Hidden Champions”, Institute for German Economics, 2022

Success Factors

4'000.

That is the number of Hidden Champions in the world. 1,573 of them come from Germany.

The most important ingredients for their success are innovation, specialization and corporate culture. 2/3 of them are family-owned and have a long history that is reflected in their thinking.

But let's go into practice to better understand what this is all about. I will highlight three German Hidden Champions and their success factors. Although they are not in our 30-stock portfolio, they are on our watch list.

Firstly, Nemetschek, a provider of software for architects, engineers and the construction industry, which is also increasingly in demand from film and video game producers (chart 2). The company is the only one in the world whose products cover the entire workflow in the life cycle of a construction or infrastructure project.

It is 51% family-owned and the founder, Prof. Georg Nemetschek, is not resting on his laurels, even at the age of 90.

If there was a prize for the least digitalized industry, the construction sector would probably be one of our favorites. The problem lies above all in the interlinking of the various stakeholders, whether architect, construction engineer or facility manager.

The construction industry is still in the Stone Age here.

Nemetschek addresses precisely this problem.

As the absolute market leader.

Chart 2: Nemetschek group segments and brands

Source: Nemetschek

Shovel Supplier

As you remember from previous arvy's Weeklies, we love shovel suppliers.

Companies that supply part of a product. If they are the market leader in their niche and provide the best quality product, they have pricing power. The piece they supply is so important to the customer's product that price is not the main factor, quality and availability are. So, they can charge a good price and increase it over time.

Take a guess. How many shovel suppliers does Apple have in Germany alone?

767!

One shovel supplier, not in tech but in healthcare, is Sartorious. Many diseases, such as cancer, dementia or inflammatory diseases, are still incurable. Sartorius supports biotech scientists and engineers around the world in the development and manufacture of drugs from the initial idea to production (chart 3).

Think of products such as pipettes or water filters (like the white things for filter coffee, but for medicine). Many products that you only use once but need every day - the term that summarizes this is single-use technology (SUT). This is a growing trend for pharmaceutical manufacturers, as it is considered cheaper, quicker to procure and, above all, cleaner than conventional methods.

Due to the very high barriers to entry resulting from the certifications and strict regulatory standards for such supplies, Sartorious operates in an oligopoly with only a few other players.

This means it is a market leader in a structural growth market due to increasing investment (research and development) and demographic shifts with older people needing more medicines and medical care.

That is music to my ears.

Chart 3: Sartorious product portfolio

Source: Sartorious

Shift in consumer trends

One key consumer trend that has changed in recent years?

People, especially the younger generations, are switching from material goods to experiences when it comes to where they spend their money.

This is a trend from which our last German Hidden Champion is benefiting: CTS Eventim.

Have you ever bought a ticket from Ticketcorner?

Et voilà, that is the company behind it. They sell tickets for events such as Taylor Swift concerts and for Euro 2024, which starts today. They are also responsible for the planning, preparation and implementation of tours, events and festivals, particularly in the music and concert sector. This also includes the public viewings they are organizing and marketing throughout Germany in the coming weeks.

The underlying event business has been growing by 8% per year for two decades. And due to long-lasting consumer trends and increasingly expensive concerts, there is a good chance that it will continue to grow even faster in the future.

You see, the host of this year's Euro 2024 has a lot of great "Hidden Champions". Nonetheless, looking at Europe, we will be rooting for the runner-up in terms of the number of Hidden Champions in the coming weeks. Switzerland with 171 of them!

With this in mind, team arvy is keeping its fingers crossed.

Hopp Schwiiz!

Chart 4: Nemetschek, Sartorious and CTS Eventim over the last 10 years

Source: TradingView