|Shares Out. (in M):||26||P/E||0.0x||0.0x|
|Market Cap (in $M):||22||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||2||EBIT||0||0|
Xpel Technologies is a high quality automotive paint protection film business that is growing at 100% yet incredibly trades for only 6.7x EBIT. This is an exceptionally cheap valuation considering Xpel’s recurring revenues, strong growth profile, high returns on capital, barriers to entry, and customer diversification.
More importantly, the growth story at Xpel is still in the first inning; only 1-2% of new cars in North America get paint protection film installed today, but recent technological improvements have finally made the product viable and I believe have the industry poised for a 10-fold increase with 20%+ adoption rates as consumer awareness continues to increase. I think the business is easily worth $1.50 per share (12x next 12 months EBIT of $3.0 M), and considering the incredibly strong growth profile here, I believe there is even realistic 10-bagger potential over the next three years as the market develops and operating margins increase. A 5x increase in volumes from current levels and 25% operating margins yields a price of $9.00 per share at 10x EBIT.
Xpel sells paint protection film predominantly in North America (~70%), although they do have a presence internationally where they go to market through distributors (~30%). The film is sold to local installers/car detailers, who in turn sell the film and install it on cars for end consumers. Installers generally charge around $500 - 1500 for the job, although prices can vary greatly due to the extent of coverage that the consumer desires. The film is applied to protect the body of the car, particular the front-end, from dents and chips often caused by rocks.
The film sold by Xpel is either in the form of bulk sheets or pre-cut kits that they have designed for every make and model combination of car. They also sell access to their database of designs (10,000+ designs) for installers that want to cut their own paint protection kits should they have the necessary plotter already in-house. Overtime, however, Xpel has been shifting the business to encourage purchases of their own film rather than have customers license their Design Access Program software and use 3rd party film. This shift has actually understated the underlying growth in film/kit sales which actually grew at a 130%+ rate in the most recent quarter.
Xpel’s growth over the past 2-3 years has been consistent and exceptional. The business has posted 9 consecutive quarters of revenue growth in excess of 45%, with 100% year over year revenue growth in the most recently reported quarter. Importantly, as mentioned above, the market for paint protection film is still in the very early stages of the consumer adoption cycle, and so the overall market is poised to increase in size exponentially over the next five years with Xpel Technologies being the prime beneficiary.
Over the last 9 quarters Xpel has posted the following revenues and growth. There is some seasonality from car sales (Q3 strongest, then Q2, then Q4, and with Q1 being the weakest), so the year over year growth is most relevant:
Q2 2013 $4.9 M +100%
Q1 2013 $3.2 M +58%
Q4 2012 $3.0 M +67%
Q3 2012 $3.2 M +89%
Q2 2012 $2.5 M +66%
Q1 2012 $2.0 M +88%
Q4 2011 $1.8 M +90%
Q3 2011 $1.7 M +46%
Q2 2011 $1.5 M +45%
Xpel’s growth surge that began two years ago coincided with the release of the Ultimate film, which now comprises around 80% of film sales. The Ultimate film was a quantum improvement over prior films, which thus allowed Xpel to not only gain significant market share but to also grow the overall paint protection market. If you spend any amount of time on the various car enthusiast forums on the internet, you will quickly determine that the Ultimate film is pretty much universally viewed as the best paint protection film in the market.
Historically paint protection films have had a multitude of issues, which become increasingly noticeable with the passage of time -- “orange peel” texture, cloudiness, yellowing, etc. Xpel’s primary competitors, 3M and Avery Dennison, still have similar issues with their films. Furthermore, Ultimate film has a unique property where it is actually self-healing. If the car is scratched, applying hot water to the surface of the car and waiting 30 seconds causes the scratch to magically disappear. The improved quality has also allowed Xpel to provide longer warranty terms than competitors, which obviously resonates well with consumers.
The improvement in film quality is important on two levels. First, it has allowed Xpel to become the quality leader in the industry, gain market share, and build tremendous brand value with both consumers and local installers. More importantly, however, it has dramatically expanded the size of the market. Because of the aforementioned issues that paint protection film used to have, this has historically been a very niche market with low adoption rates. Improvements in technology, however, as evidenced with the Ultimate film, have dramatically increased the size of the market. To put it bluntly, these films basically didn’t work and as of only a few years ago, and now they work exceptionally well. It takes time, however, for consumers to learn about and realize the benefits of having this film applied to their cars.
There is limited data on the overall market size in the US, but I believe that currently around 1-2% of new cars are getting paint protection film installed today. Window tinting, in comparison, has a 60% penetration rate. Right now penetration rates vary extremely widely geographically based on consumer awareness of the product. Mountain states like Colorado have penetration of 30-40% whereas in other major states adoption is negligible. The Calgary paint protection film market, for example, is 10-20x larger than Toronto despite being a much smaller metropolitan area by population. While I certainly don’t expect paint protection to achieve the market penetration of window tint, when you consider the cost/benefit of paint protection I can easily see the market eventually reaching 20%+ of all new cars. Clearly an increase in the overall market size by a factor 10-20x bodes well for the future growth potential of Xpel. There is also significant growth potential internationally -- particularly in Western Europe -- but with so much untapped opportunity still in North America, it’s probably not worth delving into in significant detail nor is it likely a near-term focus of management.
Another interesting aspect to Xpel is that I believe the company has significant untapped pricing power. I believe this would allow the company to double its operating margins from 13% to around 25% and provide another layer of growth on top of the significant volume increases.
While it’s difficult to quantify the magnitude of potential price increases here, I feel confident that Ultimate film could be priced a lot higher if they wanted to. You probably need to speak with a lot of film installers and car enthusiasts to fully appreciate this, but the Ultimate film is far and away better than anything else in the market. Furthermore, film is only around 10% of the cost of an installation -- a $750 install job has around $75 in film. Ultimate Film could easily command a much more significant premium as it’s the only film that’s probably not going to have yellowed in five years, and the longer warranty terms that Xpel is able to offer as a result make it an easier sale to consumers. Finally, because operating margins are “only” 13%, you only need a 10-15% price increase to double operating margins to 25%.
As for why Xpel hasn’t already taken advantage of this pricing power, I think the answer is somewhat obvious. When you’re growing at 100%, there simply isn’t a lot of incentive to milk even more money out of the business through price increases. Instead, management has been doing the smart thing by keeping prices relatively low in order to scale the business rapidly and widen the moat. In the meanwhile the company continues to expand their distribution network of trained installers and build considerable brand value, both of which will serve them well when it comes time to start taking advantage of some of this untapped pricing power.
Recurring, Low Risk Operating Model
On top of the attractive growth profile, I think it’s important to appreciate just how high quality Xpel’s business is:
Transition Away From DAP’s Gross Margin Impact
One thing that I wanted to clarify because I’m sure it will get asked about are Xpel’s gross margins. While operating margins have consistently been flat-to-up-slightly, gross margins have fallen from over 50% to 30%. This is simply due to the transition away from Design Access Program fees to film sales that I referred to above, and for the purposes of margins the transition is pretty much done.
If a customer wants to use their database of designs but not their films -- they have the best design database in the industry, so there used to be a lot of installers that did this -- they understandably have to pay very hefty design fees to Xpel. In large part to the Ultimate film’s success, you had a lot of these installers over the past 2 years just shift their film purchases to Xpel. As a result, the company was trading off the 100% margin design fee revenue for 35% margin film sales. The company gets more margin dollars by doing this, but a lower margin percentage. Furthermore, it’s clearly a stronger, stickier business model for the company to have both the design and film business of a given installer, and not just design fees. DAP fees have become so small now that the shift is no longer impacting gross margins and you can see that they have stabilized in the 30-33% range over the past four quarter.
The CEO, Ryan Pape, has done a terrific job at commercializing the Ultimate film, and he is well incented with share ownership of around 6% of the company. I have been impressed by Ryan and feel confident in his ability to take advantage of the huge growth opportunity in front of Xpel. The COO owns 4% of the company. Another 33% of the company is owned by three of the directors. In total, inside ownership is over 43% and so the float is relatively small. Management has acted very prudently and like true owners with no stock options or dilution of any sort.
I think it’s very rare to find a high quality business like Xpel, growing at a 100% rate, in a market poised to increase potentially 10-fold, trading for only 6.7x EBIT.
Due to the strong growth and operating model detailed above, I believe the company will eventually trade for a very, very high multiple once it gets discovered by investors, which I think is on the verge of happening now. This is a US listed company trading on a Canadian exchange and so the stock has languished in obscurity. I believe management understands the importance of a US listing, and this should serve as a catalyst when it happens. The company is also finally getting to the market cap levels (~$20 M) where they are starting to attract the interest of smaller institutional investors. Also, management has never done any investor relations and are finally talking about starting quarterly conference calls as early as Q1 and also potentially presenting at their first investor conference as early as December of this year. The reporting of Q3 results should also serve as a catalyst as this will no doubt be a record breaking quarter considering how strong car sales are during July and August.
|Subject||FCF & EBITDA estimates|
|Entry||09/30/2013 01:03 PM|
Thanks for the interesting write-up. What are your FCF and EBITDA estimates for this year and next?
|Entry||11/06/2013 11:10 AM|
devo et al,
Is this something that PPG would purchase? They already have a salesforce and distribution mechanism that covers auto body repair shops (and of course auto manufacturers) for automotive finishes. I spoke with someone at PPG and they formerly tried out films . . . but gave up due to lack of quality and lack of scalability.
If they believe that this is scalable (either at auto body repair or from OEMs or at dealer), I think that PPG would want to own this market and would not want 3M to own it.
It seems to me that the best valuation might come if 3M and PPG get into a fight over this.
|Entry||11/07/2013 06:38 AM|
Thank you for this fantastic idea. You mentioned 15c EPS for FY'14. I was wondering whether you might be able to share your assumptions to get there. i.e.
1) Absolute revenue number
2) Gross profit & margin
3) Operating income & marging
4) Taxes (it seems like they might run out of NOLs)
|Subject||RE: RE: 2014 estimates|
|Entry||11/12/2013 10:25 AM|
|Subject||RE: First investor conference in early December|
|Entry||11/12/2013 02:09 PM|
What do you think the "true" float is here? Is there a chance that there are long term holders that aren't filers (e.g. lower management, friends & family or other non-filing investors) that effectively reduce the float to a smaller number than your estimate?
If the float is as low as it appears, there seemingly could be a supply/demand issue with the stock itself as the company become discovered.
|Subject||RE: RE: Patents and management quality|
|Entry||11/14/2013 07:49 AM|
fair enough, and thank you for your suggestion to contact Ryan, which I already have done. I live abroad in Italy and I was thinking about ways to deal with the OEM directly to scale the business up dramatically but of course without devaluing the product. The differentiating characteristics are so important that if handled properly I would think they could multiply top line and demonstrate operating leverage. If they granted exclusivity to Audi, for example, for 2 years, they could command a high price with fixed contractual revenues and a lot of visibility. I was thinking only how to scale the business to its full potential and ignore the PPGs of this world...
|Subject||RE: RE: Questions|
|Entry||12/16/2013 01:22 PM|
Is there anything related to the conference online (presentation/notes/opinions)? Thanks
|Subject||RE: Install shop growth in California and Texas|
|Entry||01/28/2014 11:49 AM|
This reminds me a lot of Line-X, the spray-on truck bedliner company, which as Devo mentioned was bought by Graham Partners a while back. My understanding from a friend at another automotive aftermarket focused private equity fund is that this deal is an unmitigated monster home run for Graham. At my old private equity fund, as I recall we bid nearly 10x NTM EBITDA for Line-X (early '05) and didn't even get to the 2nd round for a meeting with management. We had some very good investments in the aftermarket segment and wanted Line-X badly, but just couldn't compete on price.
Automotive aftermarket is such a great industry segment, as organic growth opportunities are huge and relatively easily captured in an orderly expansion. Franchising would be another big leg up for Xpel going forward.
|Subject||RE: Jay Leno's Garage|
|Entry||04/03/2014 04:13 PM|
Thanks for the write-up - interesting thread.
It seems that your original thesis was based upon management's ability to significantly increase price. However it seems Chuplin1065 met with management (post 117) and concluded that they are actually at the high end of pricing. As such, doesn't this deflate your thesis at least 'somewhat?' I understand the remaining parts of the story would appear bullish - international, industrial, etc..However, given mangagement's express statement that they are at the high end of pricing - wouldn't it be plausible that 3M could introduce a competitive product at a lower price? I've read all the commentary between Andrew and you and understand the distribution component. However, it seems that an inability to raise price and possiblity of price compression was not baked into your original thesis? Your thoughts are appreciated. Thanks for the work.
|Subject||RE: RE: RE: Jay Leno's Garage|
|Entry||04/04/2014 10:22 AM|
Thanks for the response.
In the commentary you noted a $32M target for revenues in 2014 - that is close to an 80% increase from 2013. The last quarter only grew 65%. Do you still think they can hit $32M (especially in light of CEO comments that they could also grow just 20%)?
|Subject||RE: RE: RE: RE: RE: RE: Questions for Devo|
|Entry||04/24/2014 05:53 PM|
Biosyent still interesting here? Seems interesting but quite expensive...any thoughts on that one? Thanks
|Subject||Thoughts on quarter?|
|Entry||05/30/2014 09:13 AM|
It was inline with my expectation. GM was higher than I expected but so was SG&A. I'm modelling $27.5M in 2014 Revenue (54% growth over 2013) and EPS of $0.086/share. This quarter showed 67% growth but Q2 is going to be a much tougher compare against Q2 2013. So at $1.50, DAP is trading at 17.4x 2014 estimated earnings, which is way too cheap in my opinion. Given what I think are reasonably conservative expecatations for growth over the next 5 years, I come up with a $3/share fair value today using a 15% discount rate.
|Subject||RE: Thoughts on quarter?|
|Entry||05/30/2014 09:26 AM|
Looks like a great quarter to me. I particularly liked the CEO's reference to "aggressive revenue growth" since with Xpel all the growth is organic. Perhaps he's coming out of his shell a bit and gaining confidence in the business - he should be.
Agree on valuation, should trade much higher. Hopefully this will be the catalyst to focus on U.S. listing.
|Subject||RE: Xpel opens 4th install shop in Atlanta|
|Entry||08/22/2014 12:55 PM|
Thanks for keeping us posted... are results out I dont see anything... except the stock up 10+%.
Also do you see conflict between company-owned install shops and others? On the flip side, could this be better for other shops due to increased incentives for Xpel to market the product?
|Subject||RE: RE: RE: Xpel opens 4th install shop in Atlanta|
|Entry||08/22/2014 02:31 PM|
Just curious - is your car fitted?
|Entry||08/22/2014 04:24 PM|
any news today? what happened?
|Subject||RE: Biggest Day?|
|Entry||08/22/2014 04:28 PM|
Volume was pretty light, might not mean much.... but it's sure a good sign! :-)
|Entry||09/11/2014 01:02 PM|
devo et al,
Is there some news that I cannot find driving the price action today?
|Subject||3M Scotchguard Paint Protection Film Pro Series|
|Entry||12/30/2014 07:30 PM|
devo -- congratulations on a great call! have you heard any feedback on 3M's recently introduced product "3M Scotchguard Paint Protection Film Pro Series"? They claim it has self-healing technology (similar to Xpel's) and, of course, better durability and optics... not sure if is on par with xpel's product yet...
|Entry||01/12/2015 01:58 PM|
Thanks for the great idea and follow-up.
Do you have rough estimates for sales for 2015, 2016, 2017? I see that sales could approach $100 m and EPS of $0.50 with sales growth of 50% for three years (which would imply a $10+ stock).
What are are the major competitive risks that could hamper growth?
|Subject||Quite a deal, it appears|
|Entry||02/06/2015 09:54 AM|
Saw XPEL announced that it bought Parasol Canada, which has 79 locations through which the majority of its revenues are from selling XPEL film products for the whopping price of $1.9mm of cash and a $2.9mm 0% interest, 5-year seller's note.
As such, I bought most every share available at the open to re-start a little position.
Seems telling that no insiders were selling up in the high $3s either.
|Subject||Re: Re: Quite a deal, it appears|
|Entry||02/06/2015 02:48 PM|
Just saw this article, which says Parasol "has hundreds of independent installers and automobile dealerships as customers in key markets throughout Canada."
|Subject||Margins and Cash Flow|
|Entry||03/31/2015 01:03 PM|
I would echo aagold's concerns about margins, but I would add that is very difficult to tell in a fast-growing small company like this. Perhaps a lot of the growth costs should really be thought of as "capitalized" growth expenses.
I also wanted to add a concern about cash flow. Inventory and Accounts Receivable are growing faster than revenue and eating up cash. Any thoughts here? Reason for concern?
The numbers were not home run and perhaps call into question the 25% op margin projections, but clearly the market does not believe 25% op margins anyway.
|Subject||Re: Margins and Cash Flow|
|Entry||03/31/2015 01:08 PM|
25% operating margins? That seems extremely optimistic given FY 2014 results. I'm modeling 13% operating margins in 2018.
|Subject||Re: Re: Margins and Cash Flow|
|Entry||03/31/2015 01:43 PM|
not my number . . . just referring to the writeup and author comments . . .
|Entry||05/22/2015 01:24 PM|
Anyone know when earnings will be? Is it likely to be a similar format to last time? Thanks.