XPEL TECHNOLOGIES CORP DAP.U
July 13, 2015 - 11:59pm EST by
devo791
2015 2016
Price: 3.15 EPS 0.20 0.42
Shares Out. (in M): 26 P/E 15.8 7.5
Market Cap (in $M): 81 P/FCF 0 0
Net Debt (in $M): 3 EBIT 0 0
TEV ($): 84 TEV/EBIT 0 0

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Description

Xpel Technologies is the market leader in automotive paint protection film.  They have consistently grown at a 60%+ organic revenue growth rate over the last 3+ years yet trade for only 7.5x 2016 after-tax earnings.  Xpel has an extremely high quality business with recurring revenues, no customer concentration, a dominant market position, high barriers to entry, high customer switching costs, high returns on capital, and a very significant runway for future growth both domestically and abroad.

 

I posted a report on Xpel a little less than two years ago (and I recommend reviewing that prior post and comment thread for added detail).  Since that time, there have been many very positive developments in the business and the shares remain significantly undervalued.  These developments include:

  • The business has almost tripled in size (2-year revenue growth rate of +175%).

  • Market share has risen significantly and I believe is now around 40%, making them the dominant market leader.

  • 3M -- the former market leader -- released their long-awaited updated PPF and it was very poorly received by installers.  This failed product update appears to have accelerated 3M’s demise in the PPF industry, and I believe they have now fallen to #3, behind Suntek as well.

 

  • The only other viable PPF business, Suntek, was acquired by Eastman Chemical for $438 million, or 4.4x revenues.  Based on Q2E run-rate revenues, 4.4x revenues would imply a $9.00+ share price for Xpel.  And Suntek is largely (80%+) a window film business, which is a more mature market with much slower growth, and is significantly less attractive than Xpel’s very high growth, high barrier to entry, market leading PPF franchise.

 

  • Xpel acquired their high-performing Canadian distributor for what appears to have been a bargain price.  This has largely not been reflected in results to date as the acquisition closed in February of this year and made a fairly negligible contribution to Q1 results according to management.

  • Xpel finally expanded to Europe on a direct basis.  Europe is a huge growth opportunity for the company as the market size is very large (car sales are more than double the US), there’s less competition, and up until recently Xpel has had very little revenue in Europe.

  • Xpel finally started leveraging their valuable direct distribution network (I believe ~1000 independent film installers) to enter additional product categories.  Their first launch is a window film/tint, which has significant growth potential due to the large size of the window film market (PPF penetration is only 2-3% of new car sales in the US vs 60% for window film) and Xpel’s strong reputation for customer service and support.  Importantly management expects the product to have margins on par with PPF and it appears to be a major focus for the company.  Management has suggested that they will be launching additional ancillary products.

 

  • They’ve increased both the quantity and quality of the design templates in their proprietary database significantly over the past two years, and as the performance gap between their offering and competitors’ cutting software has widened, they are increasingly using it as a wedge to both gain market share and increase the stickiness of their existing business.  This is a very underappreciated piece of the value proposition that Xpel provides their installers.

 

In addition to the share price remaining significantly undervalued in spite of major positive developments in the business, the other reason why I wanted to provide an updated report on Xpel is because I believe the investment is very timely and that shares are at a major inflection point.  I believe that the Q2 earnings report that will be out next month should serve as a strong catalyst and drive a significant revaluation in the stock price.  I believe the Q2 earnings report should serve as a strong catalyst for a number of reasons:

 

  • The stock price is actually flat over the last 10 months -- almost a full year -- despite the underlying business having grown TTM revenues by 62%.  On top of that, there have been a number of positive developments that I highlighted above (the Parasol acquisition, launching of European direct operations, launching of a window film product) that make the current growth pipeline a lot stronger than it was a year ago.  Eventually this underlying growth has to be reflected in the stock price, and every quarter that goes by makes this more likely.

 

  • The seasonality in Xpel’s business is very poorly understood by the market.  Although new car sales have relatively muted seasonality, Xpel’s business of selling rolls of PPF has a significantly more pronounced lift in the summer quarters (Q2/Q3).  This is because their customer is essentially a mom-and-pop installer that is relatively capital constrained, and as such tends to make more of its film roll purchases in the summer months when its business is more active and they are flush with cash than during the winter months.  This seasonal pattern is very evident in each of the past four years since the Ultimate film was introduced into the market.


    The markets’ lack of understanding of Xpel’s seasonality can be seen clearly in the historical stock chart.  Growth in the business over the last 3+ years has been extremely consistent and TTM revenue growth has been maintained in a relatively tight range of 62% to 83%.  If ever there was a company that should have a smooth upwardly sloping stock chart, this is it.  Instead, in each of the past three years the stock price has been fairly stagnant for a 9 month or so period until Q2 was reported, at which point in both 2013 and 2014 the stock quickly more than doubled.  I expect this pattern to play out once again in 2015 with a similar reaction in the stock price to Q2 results.

 

  • There is significant operating leverage in the business, but it has been masked over the past three years as management has aggressively invested in headcount to put the infrastructure in place needed to drive significant sustained global growth.  The CEO explained on the Q4 CC that they had been playing “catch up” on their cost structure over the past few years, and on the Q1 CC he went as far as saying that they were now even “ahead of their needs” in terms of headcount.  As a result, I believe that operating margins are finally at an inflection point and that we should start to see the significant operating leverage manifest itself in expanding operating margins.  Because Q2 is a seasonally strong quarter, I believe this leverage should be particularly apparent in the upcoming earnings release.

    Consider that TTM EBITDA margins are 12%, and that in 2010 and 2011 -- before they started investing heavily in the business -- they had several ~20% EBITDA margin quarters, including a seasonally slow Q4 (2010), and that was with a business that was a tiny fraction of its current size when basic public company costs were a significant % of the overall expense base.  Furthermore, operating margins should also start benefiting in Q2 from the mix shift away from sales to distributors, towards increased direct business.  Part of this should come from the Parasol acquisition which will start to contribute to results, and part should come from the European expansion that is currently ramping up.

 

  • Finally, I think that Q2 results are likely to be a catalyst because of how unusually bullish management was on the Q1 call and how much the CEO’s tone changed from the prior call.  As I posted in the comment thread of the prior writeup:

     

    On March 31st (Q4 call) he said:

"Now it’s important to note that as the numbers get bigger, the revenue growth percentage we’ve seen you know will moderate somewhat, a non-aggressive reduction from the great growth we’ve seen this year. But it's probably unrealistic to consistently deliver growth in excess of 50% as we become larger. With that said, you know we’re still focused on growth, and we’re driving strong, and we complete at very strong momentum in the business."

 

On June 1st (Q1 call) he said:

 

"Overall we think that at the size of where we are, if we can drive revenue growth, year over year, in excess of 50%, we think that's a great growth rate, and so we're very pleased with that number."

 

and later on,

 

"We know those are big comps and 50% growth on second quarter of last year is a big number, but that's what we're gearing for.  And if we can maintain at that 50% number we're going to be very excited about that, and in excess of that is just a bonus."

 

So after seeing two quarters of 53-54% growth (Oct 2014 to Mar 2015) he starts to talk down investor expectations on the Q1 call and essentially says to not be surprised if revenue growth dips under 50%.  Then April and May happen and all of a sudden he's feeling bullish again and giving forward guidance of at least 50% growth.  I think it's pretty obvious that April and May, the first 2 months of Q2, must've been especially huge months for him to have changed his tone so dramatically.  And if the CEO is setting the bar going forward at 50%+ growth, you have to think that Q2 is already on pace to significantly exceed those levels considering how conservative management has consistently been in setting expectations.

 

A few additional things that need to be highlighted:

 

60%+ organic revenue growth for 3+ years

 

The company has posted 16 consecutive quarters of 45%+ organic revenue growth, and 13 consecutive quarters of 62%+ TTM organic revenue growth.  This consistency is a direct consequence of the business model and its high quality:

 

  • Revenues are recurring

  • The customer base is extremely fragmented with I believe around 1000 independent installers, which are largely single unit locations

  • Switching costs are high (once an installer is trained on and experienced with a particular film, trying to switch film suppliers can result in both increase labor and materials costs)

  • Industry leading proprietary DAP software/database and lead generation provided by Xpel increase customer captivity

  • High barriers to entry from Xpel’s significant scale advantages that give them purchasing cost advantages and allow them to offer superior service and support as they can leverage that infrastructure over a much larger sales base.

 

Revenue growth and TTM revenue growth, respectively, over the past 3-4 years:

  • Q1 2015 +54% +62%

  • Q4 2014 +53% +66%

  • Q3 2014 +72% +69%

  • Q2 2014 +70% +64%

  • Q1 2014 +67% +69%

  • Q4 2013 +65% +68%

  • Q3 2013 +52% +68%

  • Q2 2013 +100% +80%

  • Q1 2013 +58% +70%

  • Q4 2012 +67% +77%

  • Q3 2012 +89% +83%

  • Q2 2012 +66% +71%

  • Q1 2012 +88% +66%

  • Q4 2011 +90%

  • Q3 2011 +46%

  • Q2 2011 +45%

 

North America PPF adoption is still in the very early innings

While the company is aggressively expanding internationally and launching significant new products like window tint, it is easy to forget that PPF is still in its infancy in North America.  Although PPF penetration rates have increased over the last 18-24 months, I believe they are still only around 2-3% of new car sales, and I continue to believe that they will eventually exceed 20%.  This obviously suggests that there is still a huge runway ahead of the company in its core business, and that international expansion, new products, and retail expansion are incremental to this growth.

In the original report I pointed towards the 60% penetration that window tint has achieved and 30-40% penetration that had been achieved in regions where PPF was more mature like Colorado and Alberta.  Another data point that I’ve heard in recent months from management that further supports this is the performance being achieved by automotive dealers (which are the primary sales channel for the product) with PPF programs in place.  Even today, only 10-20% of new car dealers even offer PPF at all today, and many of those don’t really have a program in place where they are actively promoting the product.  When auto dealers do buy into PPF, however, they are seeing 20%+ attachment rates.

Dealers can typically make $300-$500 in profit from PPF on each sale, so there is a strong economic argument for introducing a PPF program.  As consumer awareness for the product continues to grow, it becomes an increasingly easy sale at the dealership level.   I expect as more and more new car dealers start to offer the product, overall PPF penetration rates in the industry should increase significantly.

Finally, there is a common misconception that this is a product that only appeals to car enthusiasts or luxury vehicle owners, but this is definitely not true.  First of all, the most wrapped car (and they know this because of their DAP software) is the Toyota Camry.  Secondly, I’ve often found even dealers of lower-end nameplates like KIA are successful with programs where they wrap every single vehicle that they sell.  Furthermore, I think the value proposition of the product is simply a lot more compelling than a lot of investors that aren’t familiar with the aftermarket business realize.  Automotive dealers are already very successful selling aftermarket products like paint sealant, rust proofing, and theft protection, that are often not much different in price and are arguably of much more questionable value.  In the case of products like paint sealant and rust proofing, it can be a lot of money to pay for a product that the consumer really has no way of knowing if it was even applied to their car!

 

Europe is essentially greenfield and has huge growth potential

Although the company has had ~35% of their revenues coming from international markets, what a lot of investors don’t realize is that around 2/3rds of that was from Canada, China, and the Middle East.  The rest of the world: Mexico, South America, Europe, other Asia-Pac markets, etc I believe only combined for around 10% of revenues.  It’s impossible to know with any specificity, but I believe Europe specifically was likely <5% of revenues as a result, and management has emphasized in the past that they had a negligible presence there.

It will take time to get there, but it’s hard to emphasize enough how huge of a growth opportunity this is for the company.  This is a segment of the market that is, let’s say, currently 5% of their existing business, but with European car sales more than double US levels, should probably be closer to 50% with similar penetration rates.  Put differently, if Europe had similar penetration rates for Xpel today as what they are currently achieving in the US, they would have an incremental ~$70 million in annual revenues. And that's just at today's levels -- Xpel's US business has been growing at a 50%+ rate and as highlighted above has a huge runway.

Importantly, this European expansion appears to be doing very well for the company.  Management has specifically said that the UK is performing well and that they have plans to add a presence in continental Europe this year (I suspect either Benelux region or Germany).  As of the last conference call, installer training sessions were already fully booked until September, which is a strong leading indicator for this business.

 

Lead generation is a significant competitive advantage and switching cost...

I did not write about in my prior report, but lead generation increasingly appears to be a significant competitive advantage and switching cost for Xpel.  Xpel has a dealer locator on their website, and the company generates many, many leads for their installers through this channel.  I have increasingly found that many installers derive a huge percentage of their business through these leads that Xpel generates for them.  It’s hard to imagine a more significant switching cost.  Is an installer really going to switch film providers to try to save 5% on their film purchases when let’s say 50% of their revenues are being generated by leads that Xpel is giving them for free?  An installer in this situation would see a massive decrease in their business if they ever tried to switch film suppliers.  That is what I consider a huge switching cost.

 

… and adds to their pricing power

 

Similarly, if Xpel wanted to raise prices by 5%, is that installer really going to switch film suppliers and sacrifice the half of their business that is generated by Xpel’s leads?  Highly unlikely.  I continue to believe that Xpel has significant untapped pricing power (in part from lead generation), but other than in Canada I don’t anticipate any near-term price increases.  Most investors probably don’t realize that Xpel has not raised prices on their film in many years as they have wanted to grow as fast as possible and cement their dominance in the industry.  I agree with this strategy, and this sort of short-term sacrifice for long-term value is very emblematic of how this management team has consistently operated, which perhaps should not be too surprising as insiders own around 50% of the company.  I do think that they will eventually flex that pricing power, and it has the potential to make a very profound impact on their bottom line.  With 10% TTM EBIT margins, even a 5% price increase would drive a 50% increase in earnings.

 

Valuation


Xpel is a extremely high growth, high quality business, and as such I believe it should trade for at least 30x after-tax earnings.  With Q2 being reported next month, we should be looking at next 12 months earnings of around $0.30 per share.  As such, I believe that Xpel is worth at least $9.00 per share today, which is consistent with the revenue multiple that Suntek, a significantly inferior competitor, was just acquired for.  Should Xpel continue to execute on their growth opportunities as successfully as they have over the past few years, I see the potential for value to grow far in excess of that amount, and as such even today I believe that Xpel still offers realistic 10-bagger potential over the next 3-4 years as the market develops.

 

Risks

  • They are launching the next generation of their film this year. There are always potential operating issues with any new product introduction (quality control or other such supply disruptions)
  • An economic downturn would hinder both new car sales and aftermarket products like PPF
  • While the business is quite consistent on a 12-month rolling basis, there can be quarter to quarter lumpiness that creates a short-term risk to the stock price (although doesn't really detract from long-term value).
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Reporting of strong Q2 results next month
  • Uplisting to a major US stock exchange
    sort by    

    Description

    Xpel Technologies is the market leader in automotive paint protection film.  They have consistently grown at a 60%+ organic revenue growth rate over the last 3+ years yet trade for only 7.5x 2016 after-tax earnings.  Xpel has an extremely high quality business with recurring revenues, no customer concentration, a dominant market position, high barriers to entry, high customer switching costs, high returns on capital, and a very significant runway for future growth both domestically and abroad.

     

    I posted a report on Xpel a little less than two years ago (and I recommend reviewing that prior post and comment thread for added detail).  Since that time, there have been many very positive developments in the business and the shares remain significantly undervalued.  These developments include:

     

     

     

     

    In addition to the share price remaining significantly undervalued in spite of major positive developments in the business, the other reason why I wanted to provide an updated report on Xpel is because I believe the investment is very timely and that shares are at a major inflection point.  I believe that the Q2 earnings report that will be out next month should serve as a strong catalyst and drive a significant revaluation in the stock price.  I believe the Q2 earnings report should serve as a strong catalyst for a number of reasons:

     

     

     

     

    "Now it’s important to note that as the numbers get bigger, the revenue growth percentage we’ve seen you know will moderate somewhat, a non-aggressive reduction from the great growth we’ve seen this year. But it's probably unrealistic to consistently deliver growth in excess of 50% as we become larger. With that said, you know we’re still focused on growth, and we’re driving strong, and we complete at very strong momentum in the business."

     

    On June 1st (Q1 call) he said:

     

    "Overall we think that at the size of where we are, if we can drive revenue growth, year over year, in excess of 50%, we think that's a great growth rate, and so we're very pleased with that number."

     

    and later on,

     

    "We know those are big comps and 50% growth on second quarter of last year is a big number, but that's what we're gearing for.  And if we can maintain at that 50% number we're going to be very excited about that, and in excess of that is just a bonus."

     

    So after seeing two quarters of 53-54% growth (Oct 2014 to Mar 2015) he starts to talk down investor expectations on the Q1 call and essentially says to not be surprised if revenue growth dips under 50%.  Then April and May happen and all of a sudden he's feeling bullish again and giving forward guidance of at least 50% growth.  I think it's pretty obvious that April and May, the first 2 months of Q2, must've been especially huge months for him to have changed his tone so dramatically.  And if the CEO is setting the bar going forward at 50%+ growth, you have to think that Q2 is already on pace to significantly exceed those levels considering how conservative management has consistently been in setting expectations.

     

    A few additional things that need to be highlighted:

     

    60%+ organic revenue growth for 3+ years

     

    The company has posted 16 consecutive quarters of 45%+ organic revenue growth, and 13 consecutive quarters of 62%+ TTM organic revenue growth.  This consistency is a direct consequence of the business model and its high quality:

     

     

    Revenue growth and TTM revenue growth, respectively, over the past 3-4 years:

     

    North America PPF adoption is still in the very early innings

    While the company is aggressively expanding internationally and launching significant new products like window tint, it is easy to forget that PPF is still in its infancy in North America.  Although PPF penetration rates have increased over the last 18-24 months, I believe they are still only around 2-3% of new car sales, and I continue to believe that they will eventually exceed 20%.  This obviously suggests that there is still a huge runway ahead of the company in its core business, and that international expansion, new products, and retail expansion are incremental to this growth.

    In the original report I pointed towards the 60% penetration that window tint has achieved and 30-40% penetration that had been achieved in regions where PPF was more mature like Colorado and Alberta.  Another data point that I’ve heard in recent months from management that further supports this is the performance being achieved by automotive dealers (which are the primary sales channel for the product) with PPF programs in place.  Even today, only 10-20% of new car dealers even offer PPF at all today, and many of those don’t really have a program in place where they are actively promoting the product.  When auto dealers do buy into PPF, however, they are seeing 20%+ attachment rates.

    Dealers can typically make $300-$500 in profit from PPF on each sale, so there is a strong economic argument for introducing a PPF program.  As consumer awareness for the product continues to grow, it becomes an increasingly easy sale at the dealership level.   I expect as more and more new car dealers start to offer the product, overall PPF penetration rates in the industry should increase significantly.

    Finally, there is a common misconception that this is a product that only appeals to car enthusiasts or luxury vehicle owners, but this is definitely not true.  First of all, the most wrapped car (and they know this because of their DAP software) is the Toyota Camry.  Secondly, I’ve often found even dealers of lower-end nameplates like KIA are successful with programs where they wrap every single vehicle that they sell.  Furthermore, I think the value proposition of the product is simply a lot more compelling than a lot of investors that aren’t familiar with the aftermarket business realize.  Automotive dealers are already very successful selling aftermarket products like paint sealant, rust proofing, and theft protection, that are often not much different in price and are arguably of much more questionable value.  In the case of products like paint sealant and rust proofing, it can be a lot of money to pay for a product that the consumer really has no way of knowing if it was even applied to their car!

     

    Europe is essentially greenfield and has huge growth potential

    Although the company has had ~35% of their revenues coming from international markets, what a lot of investors don’t realize is that around 2/3rds of that was from Canada, China, and the Middle East.  The rest of the world: Mexico, South America, Europe, other Asia-Pac markets, etc I believe only combined for around 10% of revenues.  It’s impossible to know with any specificity, but I believe Europe specifically was likely <5% of revenues as a result, and management has emphasized in the past that they had a negligible presence there.

    It will take time to get there, but it’s hard to emphasize enough how huge of a growth opportunity this is for the company.  This is a segment of the market that is, let’s say, currently 5% of their existing business, but with European car sales more than double US levels, should probably be closer to 50% with similar penetration rates.  Put differently, if Europe had similar penetration rates for Xpel today as what they are currently achieving in the US, they would have an incremental ~$70 million in annual revenues. And that's just at today's levels -- Xpel's US business has been growing at a 50%+ rate and as highlighted above has a huge runway.

    Importantly, this European expansion appears to be doing very well for the company.  Management has specifically said that the UK is performing well and that they have plans to add a presence in continental Europe this year (I suspect either Benelux region or Germany).  As of the last conference call, installer training sessions were already fully booked until September, which is a strong leading indicator for this business.

     

    Lead generation is a significant competitive advantage and switching cost...

    I did not write about in my prior report, but lead generation increasingly appears to be a significant competitive advantage and switching cost for Xpel.  Xpel has a dealer locator on their website, and the company generates many, many leads for their installers through this channel.  I have increasingly found that many installers derive a huge percentage of their business through these leads that Xpel generates for them.  It’s hard to imagine a more significant switching cost.  Is an installer really going to switch film providers to try to save 5% on their film purchases when let’s say 50% of their revenues are being generated by leads that Xpel is giving them for free?  An installer in this situation would see a massive decrease in their business if they ever tried to switch film suppliers.  That is what I consider a huge switching cost.

     

    … and adds to their pricing power

     

    Similarly, if Xpel wanted to raise prices by 5%, is that installer really going to switch film suppliers and sacrifice the half of their business that is generated by Xpel’s leads?  Highly unlikely.  I continue to believe that Xpel has significant untapped pricing power (in part from lead generation), but other than in Canada I don’t anticipate any near-term price increases.  Most investors probably don’t realize that Xpel has not raised prices on their film in many years as they have wanted to grow as fast as possible and cement their dominance in the industry.  I agree with this strategy, and this sort of short-term sacrifice for long-term value is very emblematic of how this management team has consistently operated, which perhaps should not be too surprising as insiders own around 50% of the company.  I do think that they will eventually flex that pricing power, and it has the potential to make a very profound impact on their bottom line.  With 10% TTM EBIT margins, even a 5% price increase would drive a 50% increase in earnings.

     

    Valuation


    Xpel is a extremely high growth, high quality business, and as such I believe it should trade for at least 30x after-tax earnings.  With Q2 being reported next month, we should be looking at next 12 months earnings of around $0.30 per share.  As such, I believe that Xpel is worth at least $9.00 per share today, which is consistent with the revenue multiple that Suntek, a significantly inferior competitor, was just acquired for.  Should Xpel continue to execute on their growth opportunities as successfully as they have over the past few years, I see the potential for value to grow far in excess of that amount, and as such even today I believe that Xpel still offers realistic 10-bagger potential over the next 3-4 years as the market develops.

     

    Risks

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Messages


    SubjectRe: questions
    Entry07/15/2015 09:26 AM
    MemberMJS27

    ...and could you share what you are assuming for a normal tax rate? ty


    SubjectSoftware Licenses
    Entry07/27/2015 05:34 PM
    MemberLukai

    Hi devo, thank you for the writeup. Do you have any figures around the number of software "seats" Xpel's installed base consists of? 

    If Xpel shifted from just providing software to providing software + film rolls, growth over the last several years should be a result of both expanding the installer base and taking film share at existing installers. I'm trying to confirm the former given that the latter logically has a finite runway before growth levels off to overall attach rates.

    Seat #s would also enable a granular analysis of unit economics as opposed to a sales growth rate based on more broad assumptions around attach rates and int'l expansion. 


    Subjectthoughts on the 2Q results?
    Entry08/31/2015 12:46 PM
    Membermrsox977

    thx


    SubjectRe: Re: thoughts on the 2Q results?
    Entry09/01/2015 11:24 AM
    Memberstraw1023

    devo,

    Just my overpriced two cents, but at this multiple of revenue, it seems to me that this large sell-off has less to to do with a revenue miss and much more to do with a lack of promised margin (even taking into account the fx effects).

    Clearly, if this company can produce even close to the margins mgmt and you think it will produce, it is very cheap regardless of organic growth. Methinks the market is getting impatient with the delayed margin story. That hockey stick always seems two quarters away.

    And in fairness to the market, I think the skepticism is becoming somewhat warranted. It would not be the first small-cap company that grew like a weed but was never able to grow its margin. Amazon can get away with it (and even be rewarded for it!), but not Xpel. In the next year, this is a margin story, not a growth story. And I think the market is correct in this assessment: this company needs to prove the margin story.

    All this means that even if you are correct in your optimism, there might be a lack of catalyst until they can prove the margin story. And I imagine that this alone forced out a lot of weak hands yesterday . . . and in light of the recent market turmoil, there are a lot of weak hands out there in value/event-driven space . . . despite all the homages to Buffett and long-term investing.

    If you are correct, cheaper than ever. But I'd happily substitute some growth for some margin because the downside here is all about the margin story failing to pan out.


    SubjectRe: Re: Re: Re: thoughts on the 2Q results?
    Entry09/01/2015 01:04 PM
    Memberstraw1023

    devo,

     

    I hear you. I even added this morning.

     

    However, I am trying to make sense of the price action. And this goes back to aagold (and my) comments on last thread (see #220).

     

    And if market was convinced that this company had sustainable margins of 15+%, the price simply could not be this low, regardless of whether medium-term growth is 50%, 30%, 20%, or even 10%. 

     

    If they can sustain 15% op margins, then we have 11% after-tax unlevered FCF. And even with medium-term 10% growth, this would deserve 18x . . . or 2x revenue. It is currently trading at 1.5x.

     

    So my only possible conclusion is that the market is far more concerned about the downside here rather than the upside. And further, the downside is dictated by an inability to sustain margins, not by whether top-line growth is going to be 20% or 30% over the next five years.

     

    Of course, trying to read what Mr. Market is thinking is folly. Mr. Market is manic-depressive. And so perhaps the best answer is that this is cheaper than ever. I hope so. I'd still like to see even more substantial margin expansion.

     

     

     

     

     


    SubjectRe: Re: Re: Re: Re: thoughts on the 2Q results?
    Entry09/10/2015 08:22 PM
    MemberLukai

    I think that the growth and the margin story are intertwined, but the real disappointment is due primarily to the slowdown in growth. 

    Pape stated explicitly his expectation that Xpel would maintain at least 50% growth. He made this comment two months into the quarter. Quick back of the envelope calc - if Xpel were growing at a 52% y/y rate (to account for management’s confidence and the “at least” sentiment) 2/3 of the way through the quarter, its growth rate in the third month of the quarter would have to be less than 2% to equal 35.2% y-y growth for the full quarter...and that's with a full quarter of Parasol. Meanwhile, due ostensibly to Parasol, SG&A was up another 15%. So, growth grinding to a halt and substantially higher expenses could be one way investors are looking at it. I'm sure there's some nuanced cadence to the quarter (has a company ever not said its quarters are back-end loaded?) so this is probably simplistic but sure looks like management was caught off guard. 

    I do get that foreign buyers likely wanted to wait to see if FX settles down but if installers are only buying once or twice per quarter as Devo reports, 3Q either has to be phenomenal or else it would seem to indicate that volume (and thus demand) is down because installers would otherwise run out of inventory (???). To take the above example a bit further, at an assumed 52% growth rate y-y in Apr/May, that’s a $4.2m monthly run rate that slowed to $2.8m in June. A $1.4m slowdown in monthly revenue run rate would sum to greater than Xpel’s entire internal inventory within four months. This analysis is probably getting too cute at this point but substantive enough that an ask questions later stock reaction isn't overly surprising. 

    It also doesn’t help that we put in a call to management on the day of earnings, the call was scheduled for 10 days out, and then they cancelled and rescheduled out to next week.


    SubjectRe: Trading
    Entry12/30/2015 10:54 AM
    MemberRay Palmer

    The selloff has been caused by the 3M lawsuit this morning. Really interesting.

     

    http://www.businesswire.com/news/home/20151230005264/en/

     


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Trading
    Entry12/31/2015 12:54 PM
    Memberedward965

    Disagree Devo.

    3M would not usually contact Xpel in advance if they intended to file.  If XPEL knew a dispute was coming, XPEL would be entitled to start the lawsuite in a jurisdiction of its choosing.  Could pick the best place in the USA, which would have to be kept for the rest of the trial.

    http://www.insidecounsel.com/2014/07/09/the-upsides-and-downfalls-of-patent-cease-and-desi

    That is why patent cease and desist letters are written with such care, so as to not threaten a dispute.

    Also, maybe the reason they didn´t take action before is that XPEL was so small?  Wasn´t worth it.  

    Maybe they didn´t contact to do a licensing agreement because they want XPEL gone.  Because XPEL´s management made 3M mad in negotiations.  Both happen frequently.

    I did buy in this morning, I figure that today´s illiquidity/tax selling/uncertainty has the stock mispriced.  Just not sure if under or over priced.  Seems a reasonable chance that 3M just wants to cause XPEL to slow down, which slow down it will, but perhaps another suitor is willing to take up the lawsuit in exchange for a discounted price.  I´m positive buyers would act if their counsel could show that the cost of settlement was not prohibitive.  

     

     


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: Trading
    Entry01/04/2016 09:49 AM
    Memberedward965

    Devo:  Fyi I spent time on the patent and felt 3M had a reasonable case.  As such, I am out of my trading position (not that anyone was following my lead).  

     

     


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Trading
    Entry01/08/2016 08:12 AM
    Memberedward965

    Jet,

     

    Sorry for the late reply, it’s been a long week.

     

    I read the patent prosecution (patent file wrapper) and 3M seemed solid in that the examiner first thought the system was obvious, but upon appeal to the patent appeal board, they disagreed and couldn´t see justification for being obvious, which is a good sign.  In addition, given how long ago this patent was filed and how XPEL was just an installer at the time, I didn’t know that prior art would exist.

     

    However, a patent is invalidated with prior art, and I have no way to know what is out there.   Neither does anyone not deeply involved with the industry, or a patent lawyer spending 100s of hours combing old magazines for references.  Not even 3M would necessarily know (think their lawyers know what was discussed in the Aug 2002 Magazine Issue of ¨Pimpn Paint Protection¨?)

     

    So, if Devo is correct that prior art exists, then 3M loses its patent and lawsuit dismissed.   Just depends on how credible you think Devo is, and Devo´s source is.


    SubjectRe: Game On!!!
    Entry01/08/2016 09:04 AM
    MemberFlashdance

    I love anytime someone uses completely unnecessary adverbs, thinking by doing so they done changed the game.

     

    https://www.youtube.com/watch?v=bOnRHAyXqYY


    SubjectUpdate
    Entry04/01/2016 01:30 PM
    MemberMSG257

    Anyone following this?  Any lawyers have perspective on the law suit? thx


    SubjectCapital increase
    Entry03/28/2017 12:16 PM
    Membercoyote

    Do you buy the reasons for the capital increase with insider participation in the sense of "protecting the core business" because of the unsual litigation issue or you just think it is pure BS? :-) 

     

     


    SubjectRe: Capital increase
    Entry03/28/2017 12:48 PM
    MemberYCOMBINATOR

    I mostly buy it... it was obvious from the docket that they were in settlement talks with 3M and it would be important to demonstrate that they had both the will and resources to litigate until the end. You could put those pieces together from the outside. But yeah, nice timing for the insiders :)

    Now that this has moved from the "always buy a litigation scare" bucket to plain vanilla investing, what does everyone think for 2017 EPS? 7% net margin on $62mm of sales and it's $0.16 EPS. Corporate tax cut would be a big positive.


    SubjectRe: Re: Capital increase
    Entry03/29/2017 06:10 AM
    Membercoyote

    So basically they said in December they would issue ~2.1m shares @ $1.43 for up to ~$3m proceeds. They have placed 1.66m shares first tranche (1.26m for directors) and on March 22 the placed 168K shares.  There are still 272K shares that might be issued @$1.43. For whom? Insiders? Is there any lock-up period for insiders that prevents quick arbitrage?

     

    Regarding numbers YCOMBINATOR I am mostly on those lines. Adjusting for those $400-500 of legal costs that theoretically won't be there, getting rid of other one-offs and temporary supply issues and adscribing value to Pro-tect I think $62m sales and >$4m net income are sensible numbers. By the way, regarding Pro-tec we know: i) XPEL paid $1.2m and ii) Pro-tec was not selling XPEL's PPF products so Protect numbers are fully accretive. Has anyone an idea of Protect's current sales and profits? 

     

    thks


    SubjectSurprising quarterly results
    Entry05/25/2017 12:51 PM
    Memberaagold

    Wow, this quarter really surprised me.  I'd been modelling in a gradual deceleration of revenue growth but nothing like this.  Even if you add back the 5% due to the new Dubai distribution center (and that logic is questionable IMO), this deceleration was rather shocking.  This is also the first quarter where they admitted to significant product quality issues due to a manufacturing change first implemented almost a year ago.  Since they're positioned as the high-end best quality PPF, I'm concerned about the reputational and brand damage that may have occurred.  Not sure now what to assume about longer term growth rate, and these SG&A costs as a percentage of revenue never seem to go down as the business scales.  I'm hoping they will eventually, but the deteriorating financial results over the last year are becoming harder to ignore.


    SubjectRe: Re: Surprising quarterly results
    Entry05/25/2017 06:12 PM
    Memberaagold

    I think your conclusion that Europe revenue grew 82% may be incorrect.  In the Q1 2016 MD&A their geographies were US, Canada and UK.  In the Q1 2017 MD&A they are US, Canada and Europe.  So it's possible that non-UK Europe revenue flowed through their US subsidiary in 2016 and their Europe subsidiary in 2017, making a direct comparison impossible.

    Given that consolidated revenue grew 11.8% year-over-year, if Europe really did grow 82% then I'm quite sure they would have highlighted it themselves.  The fact that they didn't even mention it makes it more likely that my alternate explanation above is the correct one, unfortunately. 

    Also, regarding product quality, I agree they discussed raw material quality issues some time ago but this is the first time they disclosed a problem with the quality of the actual end product sold to customers (as opposed to something caught internally).  Obviously that's a much more serious problem that impacts long term reputation and brand. 

     


    SubjectRe: Re: Re: Re: Surprising quarterly results
    Entry05/25/2017 07:40 PM
    Memberaagold

    Ok, I stand corrected on the warranty / product quality issues, they did discuss it before and I didn't remember it correctly. Hopefully you're right that no long-term damage has been done to the brand and reputation.

    However, I'm still not convinced on the European revenue growth of 83% issue.  You wrote, "The European direct business grew revenues by 82% year over year in Q1." (emphasis mine).  First of all, I'm not sure that's true.  They implied on the call that both Direct and Indirect European revenue are included in the Europe segment, so I don't think we know what happened to European Direct revenue specifically.  More importantly, was it also true that in Q1 2016 the "UK" Segment included both Direct and Indirect UK+Europe Revenue?  Not clear, at least to me.  Isn't it possible that sales to Netherlands and other continental European distributors used to flow through the US segment, just like distributor sales to China, Middle East and other geographies?

     

    If your interpretation of the 83% Europe growth is correct, how do you explain the fact that management didn't even mention it?  Seems to me they'd be very likely to highlight such a positive datapoint themselves given the otherwise grim quarter.

     


    SubjectRe: Re: Re: Re: Re: Re: Surprising quarterly results
    Entry06/01/2017 08:21 PM
    Memberaagold

    Ok, I just heard back from the CEO directly on this question of comparability between Q1 2016 "UK" vs Q1 2017 "Europe" segment revenue.  As I suspected, the name change from "UK" and "Europe" was not merely cosmetic, they actually did change the segment to which some of the European revenue is attributed.  Here's a direct quote from the CEO:

    "You are correct in how are thinking about it, that they are not directly comparable because of the addition of the Netherlands operation. Some portion of that revenue existed previously inside the US business. It was only once we had a presence in the Netherlands that the segment was renamed Europe and that revenue included. "


    SubjectNews
    Entry06/08/2017 11:26 AM
    Membercoyote

    Any new views on damage reputation and sales allocation? 


    SubjectStrange market reaction today, probably a good buying opportunity
    Entry11/16/2017 02:51 PM
    Memberaagold

    I'm surprised to see the stock down over 6% on high volume on a day when their earnings release and conference call were really quite positive.  They reported 31% revenue growth compared to same quarter last year, which was way better than I expected. Seems like they explained margin degradation and one-time restructuring expenses pretty well to me.  I'm already maxed out in terms of position size, but if anybody out there is interested in a unique microcap with a lot of runway for growth you should take a look at this one. 


    SubjectRe: Re: Strange market reaction today, probably a good buying opportunity
    Entry11/17/2017 02:45 AM
    Membercoyote

    Your point is very valid Ycombinator. Market is skeptical of top-line growth. vs EPS significant decline over the last years. I guess the issue is those "one-offs" restructuring charges, which people might think are not really one-offs at all. Why have they changed their depreciation method from DDB to straight line? I am curious as well. All these items and changes make straight comparisons more difficult. 


    SubjectRe: Re: Re: Strange market reaction today, probably a good buying opportunity
    Entry11/17/2017 10:31 AM
    Memberaagold

    The irony is that if they had negative EPS in 2014 their progress would look much more impressive.

    Think about how many companies discussed on VIC, and especially small/micro caps, are measured by metrics like EV/EBITDA and EV/Revenue, often times because they have negative or negligable GAAP earnings.  The idea is that true GAAP profitability comes with efficiencies of scale, so very small companies are judged differently and given a pass on EPS.

    As a matter of fact, that's one of the main things that attracted me to Xpel in the first place four years ago: it had true GAAP profitability, plus it was very small with a huge opportunity for growth, plus it had all the right alignment of interests between executive management / BoD and shareholders.  I'm also disappointed with what's happened in terms of EPS, but I still feel good about the CEO, the general direction of the company and their business strategy.


    SubjectRe: Strong Q4 with 53% revenue growth
    Entry03/28/2018 12:44 PM
    Memberaagold

    Not sure how to model this company in terms of going-forward expectations on Gross Margin and SG&A as a percentage of revenue. 

    Adjusting for non-recurring expenses, for the quarter GM was 24.9% and SG&A was 20.3% of revenue, leaving a skinny 4.6% adjusted operating margin.  I wish management would provide some guidance on what to expect for GM and SG&A going forward.  The profitability of the business has clearly deteriorated over the past few years.  There are many moving parts, so it's hard to get a feel for what key factors have been causing the decline.  One factor is a stronger dollar compared to several years ago, along with an increasingly international sales mix.  Another factor has been investments in UK and Europe that are expensed on the income statement.  In the most recent quarter they highlighted fast-growing low-margin China sales through a distributor. 

    The CEO tends to be very qualitative and vague in his comments which makes it hard for investors to form estimates.  Lots of statements like "we expect improvements in profitability" going forward, rather than providing any sort of quantification or range.

     


    SubjectRe: Re: Re: Strong Q4 with 53% revenue growth
    Entry03/28/2018 01:36 PM
    Memberaagold

    Thanks, that's an interesting way to look at it.  I guess you arrived at Q4 segment revenue and earnings by subtracting YTD 3Q17 from FY 2017, since it wasn't reported directly.


    SubjectRe: Insider buying
    Entry04/19/2018 11:01 AM
    Memberdevo791

    Mark Adams continues to accumulate shares via open market purchases.  He's now up to 47,250 shares bought in the last week or so.

    https://www.canadianinsider.com/node/7?menu_tickersearch=Xpel+Technologies+Corp.+%7C+DAP


    SubjectRe: Strong Q1 with 100% revenue growth, $0.073 in EPS
    Entry05/23/2018 02:10 PM
    Memberotto695

    Thanks for the update on this one.  The one piece that seems missing here is a listing on a real exhnage.  That could be the final catalyst to get a much better (and appropriate) multiple.  Was hoping that was going to be addressed on the call.  Any sense of if/when that might occur?  TSX Venture & US grey market are just so off the radar.... 


    SubjectPretty amazing what's happening with XPEL... take a look.
    Entry06/13/2018 01:21 PM
    Memberaagold

    Maybe I'm biased because I'm a long-term shareholder, but it sure seems to me like something pretty special is going on at XPEL, and the market hasn't priced it in yet.

    First of all, my FY 2018 EPS estimate is $0.315/share, and my model shows them growing FY 2018 revenues by 74% compared to FY 2017.  That may sound ridiculously optimistic, but Q1 2018 grew ~100% over Q1 2017, and the CEO said there were no one-time effects to explain that enormous jump in quarterly revenue.  So, according to my model DAP is currently trading at 11x FY 2018E EPS, and that's for a company that's expected to grow revenues by 74% this fiscal year.  Something tells me that if this model is anywhere close to correct, there's no way the stock is going to keep trading anywhere near its current price as the year progresses.  Note that Q2 is their seasonally strongest quarter, so if this quarter goes as expected the re-rating may happen by the end of August. 

    Another rather amazing thing: despite such explosive growth, I think they'll achieve significantly positive free cash flow in 2018 (excluding any acquisitions that may happen).  Their main use of cash as the business grows is changes in net working capital, and I've got them using $4.1M for that in 2018.  D&A should exceed Capex since they've got significant depreciation of intangible assets, but if we assume D&A equals Capex in 2018, then FCF is around $8.7M (net income) - $4.1M (change in NWC) = $4.6M.  How many companies can grow revenues by 74% while generating significant FCF? Not many.

    Would love to hear what others are estimating for FY 2018.  Am I crazy?

     


    SubjectRe: Pretty amazing what's happening with XPEL... take a look.
    Entry06/14/2018 11:36 AM
    Memberotto695

    aagold, I've got them at 35c this year and 48c next.  Agreed that it is cheaper now than ever.  I think if anyone came across this name now and it was trading at $7 or even $10, they wouldnt think twice about that valuation (20-30x F2018) and would even buy it thinking it could reasonably get to $15 within 12 months (30x F19).  I think the main reason is the listing on the tse venture.  I've urged them to get a higher profile US listing and then do a US roadshow.  They have that on their radar screen.  If you speak with them, please encourage them in that direction as well


    SubjectRe: Re: Re: Re: Pretty amazing what's happening with XPEL... take a look.
    Entry06/14/2018 03:52 PM
    MemberSpocksBrainX

    thanks devo!  makes sense...


    SubjectTariffs
    Entry06/16/2018 11:57 AM
    Memberpcm983

    Does anyone have an idea whether they might get hit with retaliatory tariffs by China or Europe?  Seems like China wants to go after US automotives, but that mostly means the major auto manufacturers. I'm just worried a name like this could get caught in the crossfire.


    SubjectRe: Tariffs
    Entry06/16/2018 01:33 PM
    Memberaagold

    I've been worried about that issue also.  Would need to find list of Chinese retaliatory tariffs and see if automotive film is impacted by these tariffs...

     


    SubjectRe: Re: Re: Re: Re: Re: Pretty amazing what's happening with XPEL... take a look.
    Entry06/22/2018 11:59 AM
    Memberaagold

    devo,

    In your TAM estimate post, you wrote

    "Just getting to where Canada is today implies around $900 million in revenues globally.  If you only look at the regions of the world where the company currently has a decent-sized business ($10+ million) and is growing at very high rates -- US, Canada, Europe, China -- that's around $600 million in revenues."

    I think you were referring to PPF only.  How are you arriving at this TAM estimate for PPF?  What are your assumptions?

    Thanks,

    aagold


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Pretty amazing what's happening with XPEL... take a look.
    Entry06/22/2018 03:02 PM
    Memberaagold

    Oh, I see.  Thanks for the explanation.

    According to this link, 2018 global new car sales are expected to be ~82 million:

    https://www.statista.com/statistics/200002/international-car-sales-since-1990/

     

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