Jerome Archambeaud and Eric Boroian presented their in-depth investment thesis on Delticom (GERMANY: DEX) at Wide-Moat Investing Summit 2014.

Delticom: Online tire dealer with a leading position in Europe (45-50% market share), which contributes ~70% of company revenue. Offers ~100 tire brands with 25,000 models and has a network of 37,000 fitting partners in various countries across Europe. ROCE is over 30%, driven by: 1) size/scale, making them the largest and only online tire retailer that can work directly with manufacturers (most others operate with wholesalers, increasing their costs and reducing their margins), leading to a lower cost base; 2) only player to have their own warehouses, making them more efficient and better in terms of logistics and delivery; 3) has by far the most fitting partners in the industry (37k), making them the most convenient retailer to work with (tires are bought by customers online, but need to be fitted and installed in a local dealer/garage; and 4) large installed customer base, which is extremely hard to replicate, and which will be important in the next replacement cycle. Sales could reach ~€1 billion by 2017-2018 assuming 10-15% volume growth as online penetration increases (only ~10% currently), moderate price competition, and better mix. Given the upcoming tire replacement cycle, especially in Germany, a 7-9% operating margin at some point during the period (from a current level of about 4%) is achievable, leading to an EBIT range of €70-90m over the next 3-4 years. At a 12-14x EV/EBIT multiple (similar to the last cycle), this would imply an enterprise value of ~€1.1 billion, and an equity value of ~€1 billion (~€600 million present value, discounted at 10%).

About the instructor:

Jerome Archambeaud was born in 1964 in France but lived over 15 years in Brazil. He is a graduate of Harvard University where he gained a master’s in business administration. He started running money in 2008 having spent most of his working career in the marketing departments of many big firms such as Nestlé, Walt Disney and Skype Technologies where he later became managing director. He joined Frederic Motte in April 2008 as a portfolio manager for the Focus Europa fund, and co-founded Focus Asset Managers with him in April 2011. Outside of fund management Jerome enjoys sailing.

Eric Boroian is a Portfolio Manager with Focus Asset Managers. He graduated from the London School of Economics with a graduate degree in Sociology and Quantitative Research Methods, and from Imperial College London, with an MBA in Finance. He started his career as a business analyst at Vivendi Universal, and then spent time as an equity research analyst at CA Cheuvreux, with a focus on European Consumer Staples. Eric also has investing experience in concentrated portfolios of European and US equities.

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