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Delticom AG: Successful start to the current business year

 

Preliminary revenues in the first quarter 2010 EUR 74 million (+45%)

+50% revenue growth in E-Commerce division

Hanover, 20 April 2010 - Delticom AG (German Securities Code (WKN) 514680, ISIN DE0005146807, stock exchange symbol DEX), Europe's leading online tyre retailer, has published preliminary figures for the first quarter of 2010. Revenues have increased by approximately 45% to EUR 74 million, compared with EUR 51.0 million for the same period in the previous year. E-Commerce revenues for the first quarter totalled EUR 70 million (Q109: EUR 46.7 million, up 50%).

 

Traditionally, the first three months of the year are the weakest quarter in the tyre trade. The cold and snowy winter extended until well into the quarter just ended. This provided Delticom with continued good sales opportunities for winter tyres at the beginning of the year. The company is also highly satisfied with the onset of this year’s summer tyre business. With the rising temperatures and spring-like weather conditions in March, many drivers across Europe have already switched to summer tyres in the first quarter. Frank Schuhardt, CFO: “For both winter and summer tyres our revenues in the first quarter markedly exceed our expectations.”

 

In the meantime, the majority of economic experts hold the opinion that European consumers have been less impacted by the effects of the recession than originally feared. Moreover, Delticom is benefiting from the rising trend towards E-Commerce. According to a current Forsa survey of German drivers commissioned by Delticom AG, some 40% of the respondents in the age bracket between 18 and 39 years could well envisage buying their tyres on the Internet in future.

 

 

 

Finally the stock entered its fair value range. But we still have a long way to go!

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Thanks, Fan.  Great tip!  Blessings.  :)

 

Thank you, Shai. You are always so kind.

 

Here are a few immature interpretations on the result. I have been following the company for a few years. 50% revenue increase in the first quarter, IMHO, is highly unusual. Why? Because 1st quarter is usually the weakest quarter. In fact, in the 1st quarter of 2009, revenue increased by 25%. So the comps are quite strong actually. How can Delti possibly increase revenue by another 50 percent? A few guesses here:

 

1. the harsh winter lasted well into the first quarter.

2. the North America business is extremely strong, and weak euro helped the lift of revenue. While many people questioned the viability of Delti's business in NA on this board, its revenue increased by more than 50% last year. If this were to happen in any companies in US today, I guess the company will hire a bunch of PR firms to promote it and the valuation would be 6-8x revenue. Delti simply said in its annual report that it does not expect the NA business have any meaningful impact in the near future. The company is so bad at PR that every year the annual shareholder meeting lasted less than one hour, very very few questions.

3. and finally here is my speculation. Delti is experiencing an extraordinary and fundamental change of consumer demand for tires on the Internet and it has a huge advantage over any competitors on operation efficiency, business process automation, technologies and most importantly, low price. And if I am correct, the growth is set to accelerate in the next few years. But this is only my speculation.

 

I have been thinking about the revenue growth and I could find no reason to totally justify it. I bought this stock at 13,15,20 and 26 and I wrote about it on the board when the stock price is 29. If my guess about the fundamentals are correct, Delti can have another double in two years. Hopefully I am right.

 

Fan

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Thanks, Fan.  Great tip!  Blessings.  :)

 

Thank you, Shai. You are always so kind.

 

Here are a few immature interpretations on the result. I have been following the company for a few years. 50% revenue increase in the first quarter, IMHO, is highly unusual. Why? Because 1st quarter is usually the weakest quarter. In fact, in the 1st quarter of 2009, revenue increased by 25%. So the comps are quite strong actually. How can Delti possibly increase revenue by another 50 percent? A few guesses here:

 

1. the harsh winter lasted well into the first quarter.

2. the North America business is extremely strong, and weak euro helped the lift of revenue. While many people questioned the viability of Delti's business in NA on this board, its revenue increased by more than 50% last year. If this were to happen in any companies in US today, I guess the company will hire a bunch of PR firms to promote it and the valuation would be 6-8x revenue. Delti simply said in its annual report that it does not expect the NA business have any meaningful impact in the near future. The company is so bad at PR that every year the annual shareholder meeting lasted less than one hour, very very few questions.

3. and finally here is my speculation. Delti is experiencing an extraordinary and fundamental change of consumer demand for tires on the Internet and it has a huge advantage over any competitors on operation efficiency, business process automation, technologies and most importantly, low price. And if I am correct, the growth is set to accelerate in the next few years. But this is only my speculation.

 

I have been thinking about the revenue growth and I could find no reason to totally justify it. I bought this stock at 13,15,20 and 26 and I wrote about it on the board when the stock price is 29. If my guess about the fundamentals are correct, Delti can have another double in two years. Hopefully I am right.

 

Fan

 

 

Our business involves direct response advertising.  Our sales are directly related to the response rate to our advertising and to the attractiveness of our ads that may sometimes double the response rate when we improve the pull with better copy or after trying new things. Has Delti made changes in their advertising recently that may seem small but might have large impact?  Or have they perhaps increased their ad spending that has only been less than 10% of their gross profit?

 

ps: Shai is the kindest guy I know, but he's under a different name.  :)

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Thanks, Fan.  Great tip!  Blessings.  :)

 

Thank you, Shai. You are always so kind.

 

Here are a few immature interpretations on the result. I have been following the company for a few years. 50% revenue increase in the first quarter, IMHO, is highly unusual. Why? Because 1st quarter is usually the weakest quarter. In fact, in the 1st quarter of 2009, revenue increased by 25%. So the comps are quite strong actually. How can Delti possibly increase revenue by another 50 percent? A few guesses here:

 

1. the harsh winter lasted well into the first quarter.

2. the North America business is extremely strong, and weak euro helped the lift of revenue. While many people questioned the viability of Delti's business in NA on this board, its revenue increased by more than 50% last year. If this were to happen in any companies in US today, I guess the company will hire a bunch of PR firms to promote it and the valuation would be 6-8x revenue. Delti simply said in its annual report that it does not expect the NA business have any meaningful impact in the near future. The company is so bad at PR that every year the annual shareholder meeting lasted less than one hour, very very few questions.

3. and finally here is my speculation. Delti is experiencing an extraordinary and fundamental change of consumer demand for tires on the Internet and it has a huge advantage over any competitors on operation efficiency, business process automation, technologies and most importantly, low price. And if I am correct, the growth is set to accelerate in the next few years. But this is only my speculation.

 

I have been thinking about the revenue growth and I could find no reason to totally justify it. I bought this stock at 13,15,20 and 26 and I wrote about it on the board when the stock price is 29. If my guess about the fundamentals are correct, Delti can have another double in two years. Hopefully I am right.

 

Fan

 

 

Our business involves direct response advertising.  Our sales are directly related to the response rate to our advertising and to the attractiveness of our ads that may sometimes double the response rate when we improve the pull with better copy or after trying new things. Has Delti made changes in their advertising recently that may seem small but might have large impact?  Or have they perhaps increased their ad spending that has only been less than 10% of their gross profit?

 

ps: Shai is the kindest guy I know, but he's under a different name.  :)

 

OMG, many sorries to Shai. My apologies.

 

The management of Delti is very shrewd. They once tried a TV campaign cancelled it very soon. Unlike household brands, advertising can increase their brand awareness, but not their goodwill. So IMHO, spending big money on TV or other types of advertising is a waste of money. Ultimately, price matters most. If I were the management of Delti, I would do anything to keep the costs low and the sales will follow. It is as simple as that.

 

As to the limits to Delti's growth, I do not think I have any in sight. Delti is a simple business with a very clear strategy and it has been executed very well. It has only 1.5% of market share worldwide and the people will buy more tires on Internet. If it stays on its course, sooner or later someone will notice and acquire them, especially when the NA business becomes more visible to companies like Amazon. How much will Amazon pay for Delti? It will be nothing short of one billion. Hopefully kindle will get killed by iPad and other competition, then Amazon will look around for other growth opportunities. I bet Delti will be the highest quality and lowest price target for Mr. Bezos. (he must have been out of his mind to acquire Zappos by paying over 100x EBIT and this is perfect time to make up for the mistake!)

 

Sounds like I am day dreaming......

 

Fan

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  • 2 months later...

Delti just updated its EBIT margin target this year from 8% to 9%. The news release:

 

Hanover, 28 June 2010 - Delticom AG (German Securities Code 514680, ISIN DE0005146807, stock market symbol DEX), Europe's leading Internet tyre retailer, has increased its revenues and earnings significantly in the first six months of 2010. Although Delticom might have to face headwind from a weakening consumer climate and negative base effects in the upcoming quarters, the Management Board is now confident to achieve a profitability higher than initially expected for the full year. Assuming continued positive business developments, the new 2010 target for the EBIT margin is 9% (previously: 8%). The Management leaves its outlook for 2010 sales growth unchanged; Group revenues are expected to increase by more than 10% year-on-year.

 

Delticom AG will publish preliminary revenues and earnings for the first half year of 2010 on July 20, 2010. The fully semi annual report will be released on August 10.

 

 

If anyone follows the e-Trailers closely, he or she will know how hard that is for any company in this business to increase sales and margins at the same time. I personally do not understand why analysts in this sector put so much emphasis on the sales alone. In this business, if you decrease the price by 5%, you volume can just double or triple cuz it is so easy for people on the internet to switch. It is the combination of sales and margins that matters.

 

Delti has improved revenue and margins consistently. Not one year or three years. It has a track record of ten years of consistently increasing revenue and EBIT margin in a brutal business. In my opinion, it is just amazing. The moat is getting just wider and wider as the company grows. I am happy to be a part of this story and I hope someone shares my feelings as well!

 

Have a good holiday!

 

 

 

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  • 3 weeks later...

2nd quarter result is out. And the growth slowed down significantly. If revenue for the second half does not increase at all and the margin stays at 9% as the management predicts, Delti will earn 2.06 per share for the year. I estimate that Delti will have approximately 4/share in cash at the end of year, so current price implies a 16 x PE.

 

I still think Delti is a very good investment going forward, especially when I read about Munger's comments on BYD. Those guys have demonstrated again and again that they are excellent innovator and operator. The track record just speaks for itself.

 

Hanover, 20 July 2010 – Delticom AG (German Securities Code (WKN) 514680, ISIN DE0005146807, ticker symbol DEX), Europe’s leading Internet tyre retailer, recorded revenues totalling EUR 177 million in the first six months of fiscal year 2010 – according to preliminary figures. This corresponds to an increase of 27% compared with the prior-year period (EUR 139.2 million). EBIT improved in the reporting period by 62% to EUR 16.5 million (H1’09: EUR 10.2 million), an EBIT margin of 9.3% (H1’09: 7.3%).

 

Delticom recorded in the second quarter revenues of about EUR 102 million (Q2’09: EUR 88.1 million, up 16%), following revenues of EUR 74.5 million in the first quarter (Q1’09: EUR 51.0 million, up 45.9%). Due to persistent snowy weather conditions at the beginning of the year and the early start into the summer tyre season in March sales in Q1 were higher than anticipated. Despite the somewhat cooler weather during the second quarter revenues were still in line with expectations.

 

Delticom AG will publish its full financial statements for the first six months on 10 August 2010. The report can be downloaded from the website www.delti.com within the "Investor Relations" area.

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  • 4 weeks later...

Delti's second quarter report is out and I encourage everyone to read it. The international business, especially in the US, grew 43% to 35 million Euros. If you look at the IPO of Ocoda(which is a Internet-based supermarket in UK, highly unprofitable), hopefully the spelling is right, you'd be wondering why the management has not spun off the US business and make a quick 150-200mm profit!

 

This stock went up a lot in the last few months and it is fairly-valued, in my opinion. However, I am still amazed by the fact the management has grown this business with only 100 people in such a significant way. This is nothing short of the miracle of BYD or other comparables. I am committed to surf the wave for a few more years as good things tend to happen to the good companies.

 

Thoughts on being acquired by other company like AMZN

 

Now I really doubt Delti will ever be acquired by another company like AMZN since those two doing businesses in a remarkably different way. Delti never intended to build an empire, nor did they want to crush their competitors by pure size(economics of scale). That is why they are profitable since inception. They just focused on their operations and let sales grow. AMZN secured the market earlier with massive subsidies to the consumers. Now AMZN built a huge infrastructure and it is almost impossible to downsize it. With 28K plus people, and the associated costs of pension, benefits, how is that possible to get margin expansion? I am having a hard time to imagine how companies like AMZN being able to compete with companies like Delti in a niche market. But if AMZN absorbs Delti, how is the management of AMZN going to integrate Delti into the operations?

 

Thoughts of Delti's intrinsic value

 

I always believe any online business has 2 parts of value, the operational value and "real estate" value. It is easy to put an multiple on the cash flows but it is very difficult to quantify the value of the site itself. It is very true that Delti is barely known to any consumers worldwide, but their sub-websites in around 100 countries do have recognition among the consumers. Just like a commercial property where you can sell stuff like clothing, food or fragrance, a company can sell almost unlimited possibilities on its websites as long as the website is known and trusted by the customers. With around 4m in customer base and 100+ websites worldwide, Delti will start new initiatives sooner or later to leverage that huge customer base. And whatever the management decides to do, it will be a huge success at the very start(please forgive my blind confidence in the management!). 

 

In a online business, the intrinsic value of the business is a function of profitability and size(customer base, revenue and so on). Delti is now a formidable force in the industry and the competitive position improved dramatically over the last few years. In my opinion, those values have not realized in Delti's stock price, yet.

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I only learned to check insider dealing in Germany a moment ago.

 

https://www.unternehmensregister.de/ureg/result.html;jsessionid=607331DC3C6A0F96F1128BFEE471DD57.www03-1

 

Delti insiders have been buying millions of euros worth stocks at 36-40 range. It just does not make sense for me since they can just buy back shares to increase their percentage of holdings. Anyways, it is always good to have insiders by your sides.

 

 

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  • 4 weeks later...

Co-Founder just bought another half a million euros of shares in the open market. I am just curious why he wants buy the shares at today's price. It is now trading at 25x last year's P/E and it is not clear whether the company can grow significantly in the near term.

 

I think at this price, reasonable value investors should be selling. But I also remember that to maximize gains over the long term, you should be willing to hold onto it for a long term. I bought the shares at the very bottom and I'd like to ride it to the very end. It is a bit of conviction, but I like my chance.

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For the first time in my Delti series, I recommend a sale if price keeps going up although personally I will not do it. For those of you who bought it the first time I mentioned it at 29, it has been a tremendous run. However, it seems to me the relentless upward movement of the stock price has implications on future upside. Unless there are big improvement of operations we do not know, the stock price is starting to deviate from fundamentals.

 

As a non-german, I really have no idea how the sentiment for Delti shares in the last couple of months. But it seems to me a lot of market participants have reached the common conclusion that Delti is a growth stock and deserves a high multiple. Sometimes it is really easy to buy(best return is always from those stocks you spend only 5 mins to make the decision), and hard to sell.

 

Good luck to all who bought this remarkable company. At current price, it is your judgement matters, not my recommendations. And thus this is the last post for Delti unless something significant happens.

 

Fan

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I apologize I broke my promise here :D. This will be the last post for sure!!

 

One of the founders just bought another 20k share at 46@, which is 920K euros. A friend asked about competition, moat and so on, so I will put a note in detail here to explain my thoughts on the situation. Here it goes:

 

 

"For a e-Trailer, the ultimate indication of a strength of business is the improvement of revenue and margin at the same time. Just like companies with high fixed cost structure, Delti gains better margins every time it sells one more tire on the Internet. Its website is highly automated and my guess is that 98-99% of the time you never have to contact a CSR. So as sales increase, EBIT margin widens.

 

But things get really strange here. I have researched several other big e-Trailers like OS and AMZN, Newegg. Traditional wisdom must suggest as a company doing business on the Internet, especially when it is a dominant player, it will increase its margins as sales expand. But it just did not happen. My theory is that as the sales grows, the competition also grows, and therefore the gains from economics of scale were subsidized to the consumers. Otherwise, competitors would not be shy to lower the price to get the business. The sad truth is, if you price is 10% lower on products like games, toys, books, you are going to get almost all the business. Zero stickiness.

 

Delti is an anomaly in the e-Trailer world. It has increased margin and sales at the same time for 10 years in a row and there seems to be no limit in sight for them to increase operating margin when revenue is increasing at 20% per year. It is nothing short of a miracle, just like BYD. If you read the AR, there are tons of reasons to justify it. But ultimately, after spending so much time thinking about it, it is the management who made this possible. And we both know people matter most in investing.

 

These two guys were friends when they worked for a company which manufactures tires. They wanted to give it a try and opened their shop on the Internet. That was 2000. In year one, the company had revenue of 1.5 million and was profitable. From I can recall, the company only did one round of financing and one IPO and that is all. Earnings increase every year and they paid out 100% of the earnings as dividends(not sure about early years). Almost zero options and very very modest pay. This year, they probably will have revenue of 400mm and EBIT of 40mm. They do not do expensive TV campaigns and use only use Google search engines. They only way to explain the revenue growth is that Delti really offers way way cheaper tires than its competitors. For example, Tireseasy(delti NA site) has really no recognition from consumers compared to Tirerack, but it grows at 30% per year anyways.

 

As Delti grows and gained International footprint and economics of scale, it is very hard for anyone to compete with them. Let's say we invest 10 million today and we imitate everything Delti does in NA today to start a new website called Jim&Fantires.com. There are several hurdles to clear. First, we have to do a lot of advertising to gain a footage in the market. But it is hard. We may sell some tires at promotion prices,  but people on the Internet has zero tolerance of high price. So we need to subsidize a lot to attract the traffic. Second, we got a product selection problems. Because we are a startup, we need a lot of money to build own inventories. But it is hard as well. We have no credit history, no visibility and only can stock a limited type of tires. And again, we are so hard a sell because we have no way to buy tires cheaper than Delti(they buy in bulk, I mean really bulky!). Third, we know from day one that there is a competitor offers 25000 types different tires and we all know those tires which are hardest to find are the most profitable. What we gonna do with it? If we have 100mm, yes, we can stock all of them up. But do we know which one actually sells? It takes many years of experience and data collection to understand the consumer patterns. Finally, we have got a huge problem competing with an International company. Why? Let's say we have this same term with suppliers, very good recognition and large selection now, but Delti can simply kill us by lowering the price here in NA, and use profits from EU to subsidize the operation in NA. As you can see, it is a lot harder nowadays to start a business on the Internet with big players already in place. In academic world, they call it winners-take-all effect.

 

That leaves a possibility that incumbents like Walmart or AMZN will step in and compete with Delti. The thing is that....... there are many many companies like Walmart, Costco, Canadian Tire and AMZN doing that, for a very long time. And they cannot compete effectively with Delti on the Internet. The problem for a e-Trailer selling tires is that you have to be very specialized in selling them. The warehouse, the distribution channel, the customer service system and purchasing patterns, those things are all very different compared to the existing infrastructure a company like AMZN has. If AMZN sells a game for 50 dollars, its cut is probably 8-10 dollars. A laptop? Probably 100 dollars. But a tire, bulky, expensive, hard to store and totally incompatible with existing system, will get them 20 bucks at best. So why bother(Amazon has a token exposure to tires on its website)? At this point, it really raises the question if the management of Delti deliberately prepared the company for the International expansion from day one. I doubt it, but it is possible. Delti makes money even in a country like Finland(5 million people) while AMZN has to stick to a large market like Germany to worth its while. You might wonder a company like AMZN will ever try to compete with Delti on this business.

 

Jim, I did my bachelor thesis on Web 2.0 so I guess I have a little say here, not much though :P. Doing business on the Internet, is easy. But start a new business and compete with existing ones like Delti, the challenge is insurmountable. For e-Trailers, prices and product availability are two most important things to woo customers. Once a player gained economies of scale, it takes many many years and many many millions to catch up, and there is actually a very little chance you can surpass the forerunner. Look at all the established companies on the Internet around the world. Since the dotcom bubble, how many meaningful new names have actually appeared?

 

Back to your question. What I meant is that when the company grows bigger and revenue increases, its intrinsic value increases at a faster pace. And I want to repeat here, when looking at an Internet company, it is only meaningful when you look at both operating margin and revenue growth at the same time then you have a full view of the company. I guess you are so used to evaluate companies on cash flow and earnings and NAVs. But Internet companies have their values in two parts. The first part is operation value, which derives from the earnings and cash flows; the other part is 'real estate' value, which has everything to do with the company's presence on the Internet. Just like a domain, myfavoritefood.com which has value, Delti.com and its 100+ websites which has 4 million customer has its value as well. It is just as real as a 'brick and mortar' building.

 

Delti is by far the largest online seller of tires and this gap has been widening every second. Other players are small and none of them are wired in a way to do business internationally. I would not say no one can ever compete with Delti, but it is hard, after Delti has spent 10 whole years in this area. It is like someone spent 10 years practicing piano, and there is a guy wants to catch up in just a few years. It is possible, but the odd is not very good.

 

Some of the local shops like tirerack would still be around and compete with Delti, and many more will come. But they were set up differently from the start. If those small shops cannot even compete with Delti locally, how could they possibly compete with Delti around the world? I really doubt anyone in his or her right mind would want to get into this business with a very uncertain future. It is not like investing in a steel mill. You have the very best equipment and you can be competitive. This is simply not the rule on the Internet. Thinking about the easy entry of competitors would compare oranges to apples, meaningless and confusing.

 

I hope my lengthy comments will help."

 

Best,

 

Fan

 

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  • 1 month later...

The recent development is noteworthy and my delti series continues.

 

In the 3Q, Delti hinted that the company will retain the rights as to the distribution of earnings due to working capital needs. The market panicked and the share price was in the free fall. In a matter of days, the stock dropped from 59 to 49. What is interesting is insiders reacted with buying more shares in the open market. All together, the top management bought 2.3 million worth of shares. Notably, CFO bought(rarely) in as well. The price range is 49-54. No wonder Delti would never buy back its shares. The insiders are buying them back using their own money! If I remember correctly, after the IPO the two founders own 52% of the company; now they own 54.7%.

 

Delti is now trading around 25 times 2010 earnings, which is reasonable considering its growth. What surprised me is insiders are buying shares relentlessly in the open market at today's price. Unless the management is very bullish about the prospect, they will not do so just to support the stock price. We all know at 25x earnings, there are little juice left to be squeezed. Insiders are far more knowledgable than us. So why?

 

My guess is that someone recently made an offer to Delti. It was turned down but it indicated the true value of the company. German market is cheap, I have no doubt about it because I looked through the stock list there. So the multiples of Delti is depressed compared to similar companies like TZOO or NFLX. In the last quarter, business in the US and CA grew by an astonishing 52%. By my research, Delti is nearly 20 times bigger than its nearest competitors. So sooner or later, someone will notice and pick them up; or Delti will simply dominate this niche.

 

I will make my prediction here although I am not so sure when I first wrote this on this board(I predicted 20% annually over the next 5 years). If you buy the shares today and reinvest the dividends, you are likely to get 15% return over the next 5 years even at today's price.

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  • 3 weeks later...

I understand the potential of Delti long time ago, but it seems I still cannot predict where the limit is. In the last month, Delti raised its earnings guidance twice. Here is the news link:

 

http://delti.com/Investor_Relations/pressemitteilung_IR54_en.html

 

Last year Delti increased EBIT by 78.8% to 29.4 million, and this year it can do at least 44.5 million according to the guidance. That is another increase of 51%. If you roll in my estimate, Delti can probably do 50 million this year. That values the company at around 15x EV/EBIT after cash. For a company with such a growth history and potential, I would say this is a bit undervalued. For those who bought in this exceptional company when I first mentioned it @29 on this board, you have made more than 140% of your investment in a year. And in case you have missed the first post, I have recommended it again and again, recently @54. I do not believe this growth rate will persist, but the prospect is as bright as ever. Delti has only 5-6 percent of the replacement tire market, there is plenty room form them to grow in the future.

 

What amuses me is that I doubt anyone here ever purchased the stock(let me know if you did and sent me a Christmas card!). The reluctance is understandable. When I first set sight on the German market, it was not a smooth sail. Everything is different, but I was lucky to have MartinWhitman(big thank you to you Marty!) as my guide. Still, I made a few mistakes and lost some money. But over the years, I realized that Germany is a terrific place for small investors. There are a few reasons. First, there are a lot less competition. Sharp guys like those on the board are reluctant to buy shares in foreign markets. Second, Germany has better corporate governance. Companies in Germany seldom have excessive option plans and the compensation is reasonable. Third, Germany has a unflattering stock market. The valuation is low. And finally, Germany companies have much more exposure to emerging markets than you can imagine.

 

When looking at a lot of Internet companies like Overstock, Amazon, NFLX or TravelZoo, I could not help but wondering where all the optimism came from. To me, many of the growth projections are just too unrealistic and the multiples are outrageous. Youku went to the market today and popped 160% even though it has not shown a profit. It is true Internet companies are great investments when they have built the network, but investing regardless of price is just pure madness. We will see who is naked when the tide goes out.

 

Fan

 

 

 

 

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When looking at a lot of Internet companies like Overstock, Amazon, NFLX or TravelZoo, I could not help but wondering where all the optimism came from. To me, many of the growth projections are just too unrealistic and the multiples are outrageous.

 

I would have to disagree with you here on Overstock.  Based on price to sales, they are selling at a fraction of what Netflix and Travelzoo are selling at, and about a sixth of what Amazon is selling at.  If you get the incremental improvements in net margins that I expect at Overstock.com, then it is selling for a modest price compared to its growth...and immensely cheaper than the competition.  I think after the 4th quarter and 1st quarter 2011, you'll get a better picture of Overstock's model.  Cheers! 

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When looking at a lot of Internet companies like Overstock, Amazon, NFLX or TravelZoo, I could not help but wondering where all the optimism came from. To me, many of the growth projections are just too unrealistic and the multiples are outrageous.

 

I would have to disagree with you here on Overstock.  Based on price to sales, they are selling at a fraction of what Netflix and Travelzoo are selling at, and about a sixth of what Amazon is selling at.  If you get the incremental improvements in net margins that I expect at Overstock.com, then it is selling for a modest price compared to its growth...and immensely cheaper than the competition.  I think after the 4th quarter and 1st quarter 2011, you'll get a better picture of Overstock's model.  Cheers! 

 

Parsad, you are right, I did not look at overstock closely. Sorry for the imprecise quote. Nevertheless, I doubt we will see a very meaningful margin improvement going forward due to the competition.

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I understand the potential of Delti long time ago, but it seems I still cannot predict where the limit is. In the last month, Delti raised its earnings guidance twice. Here is the news link:

 

http://delti.com/Investor_Relations/pressemitteilung_IR54_en.html

 

Last year Delti increased EBIT by 78.8% to 29.4 million, and this year it can do at least 44.5 million according to the guidance. That is another increase of 51%. If you roll in my estimate, Delti can probably do 50 million this year. That values the company at around 15x EV/EBIT after cash. For a company with such a growth history and potential, I would say this is a bit undervalued. For those who bought in this exceptional company when I first mentioned it @29 on this board, you have made more than 140% of your investment in a year. And in case you have missed the first post, I have recommended it again and again, recently @54. I do not believe this growth rate will persist, but the prospect is as bright as ever. Delti has only 5-6 percent of the replacement tire market, there is plenty room form them to grow in the future.

 

What amuses me is that I doubt anyone here ever purchased the stock(let me know if you did and sent me a Christmas card!). The reluctance is understandable. When I first set sight on the German market, it was not a smooth sail. Everything is different, but I was lucky to have MartinWhitman(big thank you to you Marty!) as my guide. Still, I made a few mistakes and lost some money. But over the years, I realized that Germany is a terrific place for small investors. There are a few reasons. First, there are a lot less competition. Sharp guys like those on the board are reluctant to buy shares in foreign markets. Second, Germany has better corporate governance. Companies in Germany seldom have excessive option plans and the compensation is reasonable. Third, Germany has a unflattering stock market. The valuation is low. And finally, Germany companies have much more exposure to emerging markets than you can imagine.

 

When looking at a lot of Internet companies like Overstock, Amazon, NFLX or TravelZoo, I could not help but wondering where all the optimism came from. To me, many of the growth projections are just too unrealistic and the multiples are outrageous. Youku went to the market today and popped 160% even though it has not shown a profit. It is true Internet companies are great investments when they have built the network, but investing regardless of price is just pure madness. We will see who is naked when the tide goes out.

 

Fan

 

 

 

 

 

Fan, we did buy a relative small amount, but I'm embarrassed to say, we sold it in the high thirty dollar range.  Thank you for your excellent recommendation.

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http://www.tyrepac.com/PressReleases/TYREPAC%20-%20Delticom%20AG%20acquires%20majority%20stake%20in%20Tyrepac.pdf

 

I was wondering why the stock price did not shot up today after the news release. I am pretty sure I am not the only person who is excited here, but there seems not many.

 

This acquisition opens a big door for Delti to enter the Asian market. Tyrepac has excellent customer service, and combined with Delti's deep pocket, operational expertise and buying power, this is going to be an explosive combination from day one. In NA and EU market, prices matter more because consumers are relatively educated about tires. However, in Asian countries, people are way more concerned about security, quality and potential fraud. A solid brand will help tremendously in the future. I believe if anyone can do it, it must be Delti+Tyrepac.

 

The market potential in Asia is dazing. China along is projected to have 150 million replacement tires demand in 2013 by Tyrepac, and the management wants to capture 1% of the market by then. That is 1.5 million tyres!!!! For the first time since my last purchase @38, I am considering buying more Delti shares at current price.

 

Fan

 

 

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  • 2 months later...

I forgot to mention Delti is going to pay 2.72/share in dividend this year, another 60% increase over the previous year.

 

This is a update I wrote a month ago:

 

"I just talked to the CFO(Frank) of Delti. Here are the key points about the questions in the message below.

 

1. Delti is going to pay dividends, and there is a small possibility they are going to buy back shares in the future. Delti is going to expand its warehousing capacity again this year by a whopping 70%. Pre-stocking will definitely suck up a lot of liquidity. Delti's shares are also being held by some very large funds and those guys are counting on the dividend. Management treaded the water recently implying a reduction of dividend and the stock dropped from 59 to 50 in a matter of days.

 

The bad news is that Delti just can't find good places to deploy its ever-increasing cash. They have looked at different product lines but doing so will require different level of attention from the management.  Frank made a few examples on the phone and I finally understand it is probably better for Delti to focus on the tires, and not to think something else. If this is true, then my previous comment about the web property value is way off the mark. The good news is tires are totally different animals from other products. It is less glamorous yet more profitable and tricky. If the new information is true, Delti's intrinsic value is probably around 90-100 per share(in a private transaction), not the previous estimate 120-150.

 

On the acquisition side, do not expect anyone makes an offer any time soon and to be honest I do not want to be a seller now. Frank is very conservative and suggested no offer available on the horizon. But that is not my reasoning. The reason Zappos was acquired is that it fit right into the culture of Amazon, just like the Diapers. But how Delti is going to fit into a company like Amazon? Companies like Zappos take customers like God and fend off their competitors by offering very good customer service. Delti has only 100 people and it can never afford it if Delti is going to offer the best price. They are just totally different business models. There are many people who will offer 100+ to do an LBO, but I doubt any incumbents will take Delti out at that price. An army of PE shops wanted to do an MBO with Delti, but the management said NO. I admire their ethics, in a big way. They had the opportunity to take advantage of minority shareholders like me, and they chose to not to do it. That is rare in today's world.

 

2. Delti's profit margin is a mystery to me over the years. It has been going up and up. The answer is simple, in the last few years, supply just could not keep up with demand and Delti has to raise price to keep the demand down. It sounds incredible, but it is true. Tires are not like books or computer games. They have to be made from raw materials. They are bulky and the capacity is limited. This is especially true today as the commodity price is rising(fast). Delti is having a very hard time finding tires to sell. This year after the expansion of warehouse is finished, the tires will be sold at a more "normal" price. Simply incredible.

 

In the last winter, competitors increased prices by 20%. But Delti only increased price by 10%. I was really overwhelmed by the numbers. I think 1% increase of gross margin will increase EPS by 10%. 1000 bps......

 

Delti is operating in an ideal environment because the cost to buy tires will increase over the years. If there is a inflation, it will help Delti on two sides. First, Delti stocks early in the year. If the price goes up, Delti will benefit from the rise and it will offset part of the inventory costs. Second, inflation will help companies like Delti with extremelly low Capex.

 

3. TyrePac is a very good buy but do not expect anything in 3 years. It is more like a joint-venture and it will probably not be consolidated. But anything can happen. China is a place where people are extremely fond of following the crowd. If the brand builds trust in the market, the takeoff will be more dramatic than that in any other country. In other words, it is very difficult to build trust in the China market. But once you have the trust and you are early, the payoff is extremely large. I think I would write another email to Frank to make my point clearer.

 

4. As I said, if management wanted to do an MBO, they would have done that 3 years ago. Those guys are very ethical.

 

My impression is that Delti is going to have another good year. But do not get me wrong. The EPS will increase only marginally because the extremely favorable weather last year generated unusually high profits. Delti is trying hard to climb up the the value chain. It is still small compared to those tire manufacturers. So as it grows larger, it will have a better negotiation position. That will lead to further increase of gross margin. So we will see a large increase in intrinsic value again even though the EPS increases less.

 

Delti is a very safe bet going forward to reap 15-20% return over the next decade, much safer than Google, Apple and Facebook. If we count Asia market in, Delti probably only has 2-3% of world market. I have witnessed how fast the lowest cost operators conquer their markets, and Delti is on its way!"

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