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Zooplus: Why Selling Pet Food Will Yield Investors 19 - 22% A Year

Published Wed, 11 Jan 2017 11:58:38 -0500 on Seeking Alpha

(Editor's note: There is much greater liquidity on the Frankfurt Stock Exchange under ticker Z01.)
The Elevator Pitch
Zooplus (OTC:ZOPLY) (OTC:ZLPSF) is the leading online retailer of pet food and supplies in Europe. Generally, in a commoditized market such as selling pet food, the lowest cost provider with the best customer service has the "right to win". We believe that Zooplus will be this winner, given its structural cost advantage versus its competitors (which we explore below). Additionally, customer satisfaction is extremely high, and we can clearly see customers' appreciation for the company's value proposition, as evidenced by the 94% sales retention rate. These unbeatable low prices and high customer satisfaction have led to a 31% annualized sales growth rate since 2010, while still possessing a long runway for continued expansion.
We believe the market is underestimating the long-term earnings power of the firm and consequently significantly undervaluing the company. For instance, the stock is currently trading at 0.9x 2016 sales while comparable acquisitions have taken place at 2 - 6x multiples. Additionally, we believe at maturity, the business will have normalized operating margins of 8 - 10%, implying a valuation of ~10x normalized EBIT.
This is extremely cheap for a dominant company with 50% market share in its category, a clear and growing advantage versus competitors, and profitable growth of 20 - 25% per year going forward. As... Read more