my favorite stock - Delti

[Baoxiaodao]

EOM

[netnet]

I don't mean to play the fool here, but what exactly would prevent anyone with the same amount of capital from replicating this?  Walton was knocking off crappy little retailers before they started knocking off the crappy big retailers.  Okay they seem to be the low cost provider in a commodity business or are they?  Are they cheaper than Costco?

 

All of which to say is what is and where is the moat?

 

[Baoxiaodao]

EOM

[tooskinneejs]

Tires are usually installed by someone other than the car owner.  Don't car repair shops prefer to supply their own tires rather than deal with the customer buying them separately (hassle to the shop, lost margin on materials, issues with respect to liability)?  If so, doesn't this limit the market for direct to consumer sales?

[SharperDingaan]

 

Slightly different perspective:

 

If this is a good business then why is it distributing 100% of net earnings every year ? As most business do not have a payback of < 1 yr their expansion related working capital can only be debt financed. Thefore the bigger they get the more leverage there will be, & at the same time that the business is becoming harder to manage.  Tears are almost enevitable.

 

It’s a tough business & they are selling on price to either those whom the factory will not sell to directly (retail), or those who don’t want to go to a bricks & mortar store.  So wouldn’t there be above average credit risk (factory refused because of the clients bad credit) ?, & above average reputational risk (their 3rd party distrubuted sub-standard tyres because they didn’t think they’d get caught) ? Drive on enough rocky roads & you will get a puncture.

 

The payouts could be interpreted as a slow liquidation - either because the majority owners are overinvested (capital re-allocation), the  business is effectively not marketable, or the banks will not lend any additional $ without additional collateral. Be sure you know what it is.

 

SD

 

[rmitz]

Tires are usually installed by someone other than the car owner.  Don't car repair shops prefer to supply their own tires rather than deal with the customer buying them separately (hassle to the shop, lost margin on materials, issues with respect to liability)?  If so, doesn't this limit the market for direct to consumer sales?

 

At least in the US, there's no real problem with shipping to local garages, and they're more than happy to take care of you.  I used to order from Tirerack all the time.  Obviously you're not going to get a place like Sears or Walmart to mount your tires, though.

[ERICOPOLY]

Obviously you're not going to get a place like Sears or Walmart to mount your tires, though.

 

On Monday I had tires mounted at Walmart.  I wasn't unhappy with the service.  I had my winter tires pulled off and my summer tires put on.  Mounting, balancing, etc... 

 

 

[rmitz]

Obviously you're not going to get a place like Sears or Walmart to mount your tires, though.

 

On Monday I had tires mounted at Walmart.  I wasn't unhappy with the service.  I had my winter tires pulled off and my summer tires put on.  Mounting, balancing, etc... 

 

 

 

That's even better than I expected, but I had forgotten about winter/summer tires, probably since I had them on separate rims, so I could change them myself. I don't know if they let you drop sip the tires there like most shops would, though.

[ERICOPOLY]

Obviously you're not going to get a place like Sears or Walmart to mount your tires, though.

 

On Monday I had tires mounted at Walmart.  I wasn't unhappy with the service.  I had my winter tires pulled off and my summer tires put on.  Mounting, balancing, etc...  

 

 

 

That's even better than I expected, but I had forgotten about winter/summer tires, probably since I had them on separate rims, so I could change them myself. I don't know if they let you drop sip the tires there like most shops would, though.

 

 

Here is their tire service website:

http://www.walmart.com/catalog/catalog.gsp?cat=495845

 

I won't be going to Les Schwab anymore.  I was able to make an appointment at Walmart which eliminated the waiting around and of course the store is enormous so I was able to do shopping while I waited for my tires.  Very convenient.  At Les Schwab I would read my Kindle while I waited, but if you are busy and have things to do it's sort of a waste of time when you could be getting some shopping done instead.

 

[DCG]

How much are you paying in shipping when ordering Tires online? I'd think shipping costs would offset the price being cheaper than buying retail. Also, most auto companies charge more to mount tires that are not purchased from them.

[FlyingArrow]

I don't know much about Delti. I have been buying tires at Tirerack.com for years. They have a strong foothold in the US and about 8 or 10 distribution centres across the country. They ship to Canada and collect duty and taxes directly.

 

I looked at the Delti website and found it wanting compared to Tirerack. Tires were about $10-$15 more per tire for what I buy.

 

There are many internet tire sellers in the US. Discount tires is one. And look at how well google adsense works! My browser is showing a discount tire ad at the bottom of this thread!

 

I have no idea how big tirerack is or what their market share is. Scale will matter and price matters most. Once comfortable buying on line there is zero "stickiness" among buyers. I happen to like Tirerack but if I can save $20 somewhere else I'm gone.

 

I'd do some serious homework on this before I invested.

 

Cheers

[Baoxiaodao]

EOM

[twacowfca]

I don't know much about Delti. I have been buying tires at Tirerack.com for years. They have a strong foothold in the US and about 8 or 10 distribution centres across the country. They ship to Canada and collect duty and taxes directly.

 

I looked at the Delti website and found it wanting compared to Tirerack. Tires were about $10-$15 more per tire for what I buy.

 

There are many internet tire sellers in the US. Discount tires is one. And look at how well google adsense works! My browser is showing a discount tire ad at the bottom of this thread!

 

I have no idea how big tirerack is or what their market share is. Scale will matter and price matters most. Once comfortable buying on line there is zero "stickiness" among buyers. I happen to like Tirerack but if I can save $20 somewhere else I'm gone.

 

I'd do some serious homework on this before I invested.

 

Cheers

 

Thanks for the input. I was curious if you are suggesting Delti is cheaper or more expensive? TireRack is a private company and it is hard to get any numbers. If you do your homework, you will find that TireRack's business model is slightly different from Delti. As you said, TireRack has 10 distribution center around the country. Delti outsourced delivery totally to 3rd party although it does have very centralized warehouses in Europe. So what model I prefer? Obviously when a company is small, it is cheaper to have company's own staff handling deliver. However, when the quantity is huge, it makes more sense just let 3rd party do it. You do not have to worry about people, about scalability and so on. It will be cheaper on the per unit basis. And that is why I like the business process automation at Delti so much.

 

You also mentioned another part of the attractiveness of the company. There is zero loyalty for the buyers, especially when tires are big ticket items for most households. If you want a game, 5 dollars will not matter to you. You want the fastest deliver so you can just play. For tires? Ultimately, the company with the lowest cost and cheapest price will prevail. It is as simple as that.

 

I have a very very smart friend who read about this company and could not get it. Not many people can get it in the first read. As I said, the reason I was buying at 13,15,20 and 26 is that as time goes by, I know this company better and better. Amazon has 60k people and 24b revenue. So per revenue is 400K, while Delti is 3.5mm. Numbers speak for themselves.

 

So what exactly I expect from Delti in the long run? First, I am expecting they will pay out 100% net earnings over the next few years. Second, I am expecting revenue growth at 10-13% and EPS 15%. At that, the total return will be 20% over the next decade. Finally, the franchise value was not reflected in the stock price at the moment.  I have been thinking hard if I am a buyer, how much I would like to pay for this company considering all the stuff I mentioned? My conservative estimate is that Delti is worth 20-25x earnings. You may agree with that or not. It is just my personal opinion.

 

A final word is to those people who make comments on this post. I spent many many hours on my research and I want informative input here. If you don't have any experience with the industry or at least have read the annual reports, please keep your opinion to yourself.

 

BXD

 

 

Bao, Thanks for your thoughtful posts on Delticom.  A word to the wise.  Be open to feedback from those who don't agree with you, even from those who may not be as informed about a company as you are.  There is little value in overwhelmingly positive feedback.  This leads to herding behavior.

 

More improvement comes from criticism than from praise. Criticism may sometimes help uncover blind spots or give us new perspectives.  Even criticism that misses the mark may be beneficial if it leads to reflection that stimulates a more rigorous analysis or a broader field of view.

 

I generally agree with your analysis.  It appears that their customers do indeed have 'stickiness.  About one third of their sales last year were to repeat buyers with a higher sales amount than for new customers.  Considering their high growth rate and the long time it takes tires to wear out, this indicates great loyalty for what appears to be a commodity product.  Their profit margin is improving as they move away from drop shipping toward their own outsourced distribution.  At the same time, their return on capital is dropping into the mid 20% from 50%+ in their early years.  This is counterintuitively a good thing because they would have very little moat as a drop ship business.  Their main investment is inventory which is giving them a very broad selection and helping avoid stock outs.  

 

Their biggest plus is their capital management, paying out almost all their profits beyond the small amount needed to support their current growth of about 20+% per year.  This is the Achilles heel of most businesses -- using retained earnings to chase less profitable business.

 

Nevertheless, the other posters have a very good point: The North American retail market is much more efficient than in Europe.

How are they going to compete with Costco that has a 14% gross profit margin when their current margin is 26%?  How are they going to compete with Walmart and all the other discounters that have GPM's that are only slightly higher than Costco's?

 

Besides North America, do they have substantial opportunities for growth in new countries where they don't currently have significant sales?

[Baoxiaodao]

I don't know much about Delti. I have been buying tires at Tirerack.com for years. They have a strong foothold in the US and about 8 or 10 distribution centres across the country. They ship to Canada and collect duty and taxes directly.

 

I looked at the Delti website and found it wanting compared to Tirerack. Tires were about $10-$15 more per tire for what I buy.

 

There are many internet tire sellers in the US. Discount tires is one. And look at how well google adsense works! My browser is showing a discount tire ad at the bottom of this thread!

 

I have no idea how big tirerack is or what their market share is. Scale will matter and price matters most. Once comfortable buying on line there is zero "stickiness" among buyers. I happen to like Tirerack but if I can save $20 somewhere else I'm gone.

 

I'd do some serious homework on this before I invested.

 

Cheers

 

Thanks for the input. I was curious if you are suggesting Delti is cheaper or more expensive? TireRack is a private company and it is hard to get any numbers. If you do your homework, you will find that TireRack's business model is slightly different from Delti. As you said, TireRack has 10 distribution center around the country. Delti outsourced delivery totally to 3rd party although it does have very centralized warehouses in Europe. So what model I prefer? Obviously when a company is small, it is cheaper to have company's own staff handling deliver. However, when the quantity is huge, it makes more sense just let 3rd party do it. You do not have to worry about people, about scalability and so on. It will be cheaper on the per unit basis. And that is why I like the business process automation at Delti so much.

 

You also mentioned another part of the attractiveness of the company. There is zero loyalty for the buyers, especially when tires are big ticket items for most households. If you want a game, 5 dollars will not matter to you. You want the fastest deliver so you can just play. For tires? Ultimately, the company with the lowest cost and cheapest price will prevail. It is as simple as that.

 

I have a very very smart friend who read about this company and could not get it. Not many people can get it in the first read. As I said, the reason I was buying at 13,15,20 and 26 is that as time goes by, I know this company better and better. Amazon has 60k people and 24b revenue. So per revenue is 400K, while Delti is 3.5mm. Numbers speak for themselves.

 

So what exactly I expect from Delti in the long run? First, I am expecting they will pay out 100% net earnings over the next few years. Second, I am expecting revenue growth at 10-13% and EPS 15%. At that, the total return will be 20% over the next decade. Finally, the franchise value was not reflected in the stock price at the moment.  I have been thinking hard if I am a buyer, how much I would like to pay for this company considering all the stuff I mentioned? My conservative estimate is that Delti is worth 20-25x earnings. You may agree with that or not. It is just my personal opinion.

 

A final word is to those people who make comments on this post. I spent many many hours on my research and I want informative input here. If you don't have any experience with the industry or at least have read the annual reports, please keep your opinion to yourself.

 

BXD

 

 

Bao, Thanks for your thoughtful posts on Delticom.  A word to the wise.  Be open to feedback from those who don't agree with you, even from those who may not be as informed about a company as you are.  There is little value in overwhelmingly positive feedback.  This leads to herding behavior.

 

More improvement comes from criticism than from praise. Criticism may sometimes help uncover blind spots or give us new perspectives.  Even criticism that misses the mark may be beneficial if it leads to reflection that stimulates a more rigorous analysis or a broader field of view.

 

Thanks for the words. I appreciate that. Thanks for the comments and I take my words back.

 

BXD

 

 

[twacowfca]

Bao, please note my additional comments added to my post while you were replying.  :)

[twacowfca]

Bao, the latest posts about how poor their customer service is in NA seems to shed light on their model for growing their business.  Apparently, they go into a new country away from their core distribution European market as a drop ship business using wholesalers to supply and ship the tires, rather than buying their tires directly from the manufacturers.  This can be a minefield.  A wholesaler may substitute brands or, from the BBB complaints, ship returned or defective tires if the wholesaler isn't first class.  Is this how they open up new markets?  Their business will never gain traction here if they don't get their act together.  Is this uncharacteristic of how they do business in Europe?  Do they have significant unresolved complaints in Germany?

[Baoxiaodao]

EOM

[beerbaron]

I think that Baoxiaodao is betting that the moat is it operating efficiency and that no competitors would likely match it's low cost operation. That is a big IF! Anybody seen how efficient Amazon or Mouser (TTL) are... these operations are impressive.

 

Still Baoxiaodao, on pure metrics the stock look 30-40% undervalued. It's not a bad investment at all but with those stocks with potential short term competition increase you gotta be a lot more active to pull the trigger and sell as permanent impairement is more likely to happen then with say Wal-Mart.

 

BeerBaron

[Baoxiaodao]

EOM

[SharperDingaan]

 

You might want to look at how this selling model has evolved over the years.

Your underlying premise is that because you dont need 'bricks & mortar' storefront you have easy scalability & minimal infrastructure. Yet today, most vendors selling primarily through the net - have at least a few bricks & mortar stores. Sales just work a whole lot better when folks can see/feel the product, & the store showing them has your logos all over it (even if you're just transactionally 'renting' the storefront from someone else for a fee).

 

What's more profitable? Long or short

There's a valid case for long term hedging, & covering the hedge at a gain every time bad press hits them; ie: competitors, reputational risk, adverse earnings surprizes, & leverage now work for you, vs against you - so long as there's a reasonable probability of ongoing 'events'. 

 

Putting an idea to scrutiny is about generating alternate insights that would never have been otherwise considered. Keep an open mind, & possibly learn a thing or two.

 

SD 

[Baoxiaodao]

 

You might want to look at how this selling model has evolved over the years.

Your underlying premise is that because you dont need 'bricks & mortar' storefront you have easy scalability & minimal infrastructure. Yet today, most vendors selling primarily through the net - have at least a few bricks & mortar stores. Sales just work a whole lot better when folks can see/feel the product, & the store showing them has your logos all over it (even if you're just transactionally 'renting' the storefront from someone else for a fee).

 

What's more profitable? Long or short

There's a valid case for long term hedging, & covering the hedge at a gain every time bad press hits them; ie: competitors, reputational risk, adverse earnings surprizes, & leverage now work for you, vs against you - so long as there's a reasonable probability of ongoing 'events'.   

 

Putting an idea to scrutiny is about generating alternate insights that would never have been otherwise considered. Keep an open mind, & possibly learn a thing or two.

 

SD 

 

I think one thing I learned about posting the idea is that people have different opinions. And that will lead to discussions worth taking. Thank you for the responses. SD, with all due respect, it seems we have different thoughts about this idea. But Delti is a probably more complicated case than you thought.

You probably want to read the annual reports to get a better picture of the investments.