Description

Xpel VIC Write-Up

Note: Devo has done an excellent job posting Xpel twice on VIC and regularly updating VIC members. Mip14 is not submitting Xpel as 1 of our 2 annual ideas but simply updating the VIC community on Xpel’s investment thesis.

Xpel sources, distributes, and installs aftermarket automotive products, including paint protection film (PPF), headlight protection film, and automotive window films. Recently, Xpel has begun selling commercial and residential window film and security film but that represents <3% of total revenue. In the recent quarter, Xpel generated 80% of its sales from paint protection film, 8% from window film, 5% from film installation (company-owned stores), 4% from software and 3% from other products (largely commercial and residential window film).

Xpel’s competitive advantage stems from its recognized brand, relationship with installers, and company-owned stores. Our conversations with installers suggest that Xpel is the only PPF player that is truly investing in its brand. One installer told us that 3M is more focused making money selling post-it notes than they are selling paint protection. In addition, installers say that the new Xpel Ultimate Plus product is “more forgiving” to installers and is a great product innovation. Xpel recently helped Sun Stoppers, one of their customers, set a Guinness World Record for Window Tinting, which highlights Xpel’s focus on brand building. The 3rd player in the industry, Suntek, was recently acquired by Eastman Chemical (for over 4x sales), and we believe it’s likely that Suntek’s growth will be stifled by Eastman’s conglomerate structure and corporate bureaucracy.

Over the past 5 years, Xpel has grown its revenue around ~40% a year. This has been driven by increased penetration of paint protection film (% of new cars installing PPF), market share gains for Xpel from 3M and Suntek, and geographic expansion. Notably, we believe that paint protection is still very underpenetrated. For example, we calculate that in 2018 PPF is ~4% penetrated of North America new car sales, and Xpel has around a 36% market share in the region.

What is exciting is that North America is still growing quickly. Canada, Xpel’s most penetrated market, grew ~40% in the last quarter. Outside of North America, the growth is even faster. In the last quarter, Europe’s revenue doubled y/y and China’s revenue more than quadrupled. We expect Xpel’s revenue growth rate to moderate from the ~100% in Q1 and ~70% in Q2, but we believe they can grow revenues at 30-40+% for several years. Despite the business getting significantly larger over the past few years, revenue growth has accelerated in the most recent few quarters (100+% two year stack). We think it is important to note that more mature markets in the US, such as Colorado and Utah, have recently hit 30-40% penetration for PPF.

Overall, we think it’s realistic that Xpel eventually generates over $260m in sales in North America. The North America new car market is ~19m units vs. ~85m globally (~22% of total). As Xpel penetrates other geographies, such as China (~25m) and Europe (~18m), there is a credible path Xpel reaches over $1b in PPF sales.

We think that now is the best time to own Xpel because its revenue is accelerating and its margins are rapidly expanding. Xpel has been barely profitable the last few years because of a lawsuit from 3M, which has been resolved, and management’s focus on investing into the business, specifically in Europe. Now, we believe that Xpel will generate a ~12% EBIT margin this year, versus 4% last year (and 11% in 1H 2018), and expect Xpel to generate a 15-17% EBIT margin in the mid-term based on management guidance (~32% gross margin, 15-17% of sales on SG&A). Though it is difficult to model exactly how Xpel’s margins wll shape up over the next few years, we expect them to be moving in the right direction. Furthermore, we are confident that should management choose to invest more into the business, they will do so when the associated returns are high. Why? Xpel’s management team chose to invest into the business over the past few years instead of focusing on near term profitability despite significant insider ownership (~45% of the company) and pressure on the stock price. Fortunately, many new investors can now enjoy the benefits of these investments without going through the harrowing rollercoaster ride incumbent investors, such as ourselves, went through!

At $6.54, Xpel trades for ~10.6x our 2019 EPS of $0.62 ($162m in revenue, $23m in EBIT, 25% tax rate). If Xpel were to trade at 3-4x 2019E sales, which is where Xpel traded in 2014-2015, this would correspond to a $17-23 stock price. Notably, we think Xpel should trade at a higher multiple today because 1) market multiples are higher; 2) Xpel is a much more diversified company; 3) revenue growth is faster today; and 4) Xpel is reaching significant revenue scale such that its no longer a “small nano cap” but a growing “small cap.” On our DCF, which is based on Xpel reaching $900m in sales in 2030 with a 20.5% EBIT margin and 25% tax rate, Xpel is worth $38/shr (10% WACC; 3% terminal growth). No matter how you slice it or dice it, Xpel is likely worth several multiples above its current share price.

We think that a big reason Xpel trades where it does is because it’s listed on the Toronto Stock Venture exchange. The company has told us earlier this year that it's a matter of when, not if, Xpel lists in the US and the urgency will increase when Xpel’s stock is above $4/shr (check) and the Mcap is above $100m (check). We challenge VIC members to find companies listed on the NYSE or Nasdaq that trade at 2x LTM sales, have margins increasing, and are growing top-line 30-40+% consistently.

In a sentence, Xpel is a $110m sales company with a 5+ year runway to grow revenues 30-40+% annually and expand margins, that trades for <11x 2019E P/E with no financial leverage and little capital needed to grow. We believe that ~$20-25/shr represents fair value today.

Links

XPEL Guinness World Record Tint Challenge with SunStoppers
https://www.youtube.com/watch?v=J5a69DbGkOE

Catalyst

Uplisting to NYSE/Nasdaq from OTC

Continued revenue growth + margin expansion

Potential acquisition by strategic