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DAP-U.V - Xpel Technologies


snowball82

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This stock has a great growth potential. I bought the stock few months ago... Mr market can't ignore the profitability here ! More than 29 % ROA, 40% ROIC & 50 % growth rate !!

 

 

About XPEL Technologies Corp.

Overview

 

XPEL Technologies Corp. (TSXV: DAP.U), publicly traded on the TSXV Exchange, is the developer of the Design Access Program software, and manufacturer of XPEL™ Automotive Paint and Headlamp Protection Products. XPEL has forged the cutting-edge of automotive protection technology, and leads the industry in price, quality, technical support and customer service. The Company's state-of-the-art Design Team develops industry-best products for the ultimate in vehicular protection. XPEL focuses on servicing and supporting its customers, while diligently marketing its unique products to the motoring public. For those with a vision into the future and an energetic entrepreneurial spirit, XPEL has developed a Dealer Program designed to assist individuals and companies in the offering of stealth-like Paint and Headlamp Products on a global basis.

 

Last trade 1.49

New retailers network in Europe

Nice net margin

Not capital intensive

 

http://www.xpel.com

 

See the product on Persad's car ...

 

 

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Also worth noting is 3M's offering in this field is woefully old, and the playing field isn't large enough to warrant them trying to come in and squash Xpel. Even if they do, the product itself has to be custom installed for each vehicle. Hence the fat margins, but for customers with luxury cars, it's worth it to spend more for a better job with better material than use a cookie cutter 3M product.

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I believe they also offer the machinery to cut the film as well. So how it works, they sell/lease this machinery to retail outlets, I believe with pretty poor margins, then continuously update the machine's software with the specifications for new car models. Then they also sell the rolls of film to the outlet as well. So the great margins come from the renewal of film inventory, fees, etc. it's more of a franchise model than anything.

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Snowy, not sure exactly what and who this company is?  here are some questions I have after doing some initial dd.

 

Is the company the same as Reflex and is that the same as the Texas company XPEL?  Is the company only able to do business in Canada and only exclusively in Manitoba, but not in the US?  Are they a distributor for film made by 3M and Avery Dennison?  Is the software their key product and is that licensed from the film supplier?

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PPF is one of fastest growing industries in automotive aftermarket. Market penetration in North America is 4%, compared to 60% for window tinting, so there's plenty of room for growth. Other opportunities for growth: international sales and applications other than automotive. Xpel's been signing up more dealers and international distributors. The top guys - 3M, Suntek, Avery Dennison, and Xpel Technologies have sticky business models. They all have dealer programs offering film (full or pre-cut), software, training, and customer service. Xpel is an attractive option for installers because they offer 10-year warranty that covers yellowing. Installers usually offer multiple brands that they feel comfortable working with.

 

It's trading close to 20x EV/EBIT, so at first glance you'd think the valuation is too high. But for a capital light business with huge organic growth opportunities, it's not too bad. There's a VIC write-up with more details: http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/105692

 

Also, here's the only presentation I have seen online by the company: http://microcapclub.com/2014/01/microcapclub-invitational-xpel-technologies-dap-u-xplt/

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I prefer to invest in companies where I don't have to make a 50% growth assumption to make the investment profitable. I see this company written up on several blogs but I don't understand its attractiveness - I don't see a margin of safety. Competitors could enter the market, the CEO might not execute as flawlessly as is priced in, there could be problems with its products, maybe they infringe patents. They only have 40 employees so any random fight could mean a huge problem.

 

An optimistic scenario is already priced in and for a small-cap with 50% ROIC and 50% growth rates I think history shows that these results are likely not sustainable. I'm not confident enough in my capabilities to see why this would be the exception.

 

(bear case)

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I don't understand its attractiveness - I don't see a margin of safety. Competitors could enter the market, the CEO might not execute as flawlessly as is priced in, there could be problems with its products, maybe they infringe patents. They only have 40 employees so any random fight could mean a huge problem.

 

+1

 

I find myself thoroughly confounded by the assumptions for this "investment" to work. Are people so enamoured by the upside that they cannot see the downside OR it is me who lacks the ability to quantify the downside ?

 

I don't see a way to make an informed decision about their product (it is new), competitiveness (competitors?), growth, margins (new product, so no history of margin) etcetera. There  are too many unknowns to call the buying of the company an "investment". I have decided to miss out on the the incredible upside this company offers.

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Their film is self repairing. But i found out that one other company also seems to have this. So what is stopping 3M or other large film companies to reverse engineer this? Sure they have a huge market ahead, but I am not really convinced by their moat. If this was protected by a patent, then i would like the company. But they are not. At 10x earnings it looks nice, but not at 25x.

 

If 2 years down the line 4 other competitors have the same product then I don't see them growing like this?

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Their film is self repairing. But i found out that one other company also seems to have this. So what is stopping 3M or other large film companies to reverse engineer this? Sure they have a huge market ahead, but I am not really convinced by their moat. If this was protected by a patent, then i would like the company. But they are not. At 10x earnings it looks nice, but not at 25x.

 

If 2 years down the line 4 other competitors have the same product then I don't see them growing like this?

 

There is only one document on this company that my EDGAr search found.  In it there is strong inference they are using a 3M or Avery Dennison product.  further, it looks like they can only do business in Canada and by inference not the US.  While there could be later documents on SEDAR that contradict this due to a change in agreement or operations of the company, it would seem to be the burden of those who like the stock as a long to produce or cite such documents if they exist.

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XPEL definitely operates in the US. (http://locator.xpel.com/search/clearbra_installers/United_States)

 

Regarding the marketplace, here is a review I found (disclaimer: I am not sure if this covers all the films available):

 

Which brings me to the point of this thread, and that is to share my experience of the different PPF products as I have had personal experience of Armorfend, 3M ScotchGuard, Ventureshield Ultra, and most recently XPel Ultimate film.

 

Armorfend

Armorfend is, imho, very old school technology: This was installed on my silver grey CSL a few years ago - it was very thick, it was obvious, and it went yellow after a while. Was it effective at doing its job? Yes, but it was a relatively crude product. I am unsure if it can be sourced today, so it is safe to eliminate this as an option for anyone thinking about it. I eventually had the Armorfend replaced.

 

3M Scotchguard

3M ScotchGuard was touted a few years ago, and I also had my Polar Silver GT3 filmed in this about 5 years ago. It was a complete frontal kit with other selective areas filmed including the doors, sills, rear spoiler, bumper etc. It was one of the earliest 911s to be filmed in the UK, and the overall quality of 3M was superb: it was shiny, it was very durable. The only downside was that it could not quite cover the entire bonnet in one piece because 3M did not manufacture it (initially) in a wide enough film to cover the entire width of the 996 bonnet as it approached the windscreen. Against Polar Silver, the film disappeared completely and you could only see it when you looked very closely and knew where to look. It was durable, and despite many trackdays the film never let a stone through.

 

Ventureshield

Recently, I decided to try Ventureshield Ultra on the recommendation of many friends who had had their cars filmed in VS. The most remarkable aspect of Ventureshield is how thin it is. It is noticeably thinner and more pliable than 3M, and it is this quality that allows it to be easily applied and 'wrapped' around body panel edges making for what should be an invisible application. This time the donor car was a Basalt Black 911 and the car was to have a complete wrap front to rear, and there were no film 'joins' anywhere on the car. This was going to be a challenge! The quality of the install was ok with all edges wrapped, but the film itself fell far below my expectations.

 

Ventureshield film is reasonably glossy, but probably less so than 3M Scotchguard. Not great then. Importantly, the film evidenced flaws: both in the film itself as visible particles, and because it is so thin, the film showed stretch marks which looked unsightly and very obvious on a black car. Worse yet, the film failed on it's primary purpose: protection. Because it is so thin, a stone went straight through the film and marked the paint underneath shortly after it was installed. Despite being highly recommended, the product is mediocre at best, and I decided to have the VS film removed.

 

XPel

XPel Ultimate is the latest product in PPF, and is touted as the world's first 'self healing' film. XPel demonstrate the self-healing properties on their website -

, and I can attest to trying that test myself (on a test patch of XPel, not my car!) and seeing the scratches disappear in front of my own eyes. It was remarkable. After being disappointed with Ventureshield, I decided it might be worth trying XPel. Full coverage too, so the results can be a direct comparison to Ventureshield.

 

XPel is thicker than VS, and it has a much smoother and more even topcoat than VS. It is glossy, and it is very even. The film has negligible flaws in the film itself - in fact, across the entire car, I can't see any flaws in the film itself. Unlike VS, it does not show any stretch marks, so the films is invisible against the paint. The combination of being a thicker film (compared to VS) and the very smooth/even topcoat suggests that it will be more resilient to marking and stone chips than VS. The application itself is superb, and 'full coverage' is genuinely full: everything is covered - more than Ventureshield covered - and they also covered the rear louvred spoiler. XPel does not cover the car in one piece, in particular from A-pillar through the rear quarter. There is a join, but you really need to look for it very very carefully to see it. When I first looked for it (and knowing where to look), I could not find it - it required a second and more detailed look to find it.

 

The headlights are also covered, but in a different XPel Headlight film that is much thicker especially designed for headlights. http://www.xpel.com/dealer/member/documents/mkt304...

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Also, just got off the phone with an installer in NJ who recommended Suntek and Xpel as the two companies at "the top of their game". He criticized the Avery Dennison product (Nano Fusion) as being difficult to install. "For every one good lay, there are two bad ones".

 

He recommended the Suntek product over Xpel. Xpel he believed was more brittle and easy to tear during installation. It requires some stretching of the film during installation, and if not done perfectly, would easily tear. I guess the insinuation is that Suntek did not have this problem. He also downplayed Xpel's 10 year warranty, saying most people did not have their car for 10 years, etc.

 

Finally he guided me to this website (http://www.tintdude.com/forum/index.php/forum/321-paint-protection-film-clear-bra-forum/) for reviews from professional installers and how they feel about the various products available.

 

Hopefully this will be of aid to someone here.

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Very pricey stock...

 

Xpel should earn around $0.15 in EPS this year.  Backing out a bit of cash the stock trades for only 9x earnings.  And that's for a business growing revenues at a 70% rate, earnings at a 100%+ rate, recurring revenues, huge growth runway, huge barriers to entry with switching costs, significant ancillary markets for them to expand into, etc.  Xpel's stock isn't "pricey", it's absurdly cheap given the company's fundamentals.  It should trade for 40-50x earnings, not 9x earnings.  Once the stock gets on institutional radars I suspect the current low share price will be a distant memory.

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huge barriers to entry with switching costs? what is other film companies stopping from releasing a similar product at least within a few years?

 

And with 1.6 million of net income this year, with a 50% growth rate next year, that is about 2.4 million. With a market cap of 40 million. That is like 17 2014 earnings. Not exactly cheap. You need to be very sure that they will keep growing at that rate for a few years if you want to make good money on this one.

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huge barriers to entry with switching costs? what is other film companies stopping from releasing a similar product at least within a few years?

 

There is already a company with a similar product, Suntek, and they've had their product on the market for quite a while now.  It doesn't matter.  The film itself is already fairly commoditized.  Xpel is first and foremost a marketer and distributor of paint protection film.  Success in this business is a function of strong marketing, customer support, training, software, design database, brand name, and of course price.  Xpel is easily best-in-class in these areas which is why they continue to be so successful.

 

And yes, Xpel has a huge moat and there are switching costs.  Xpel largely competes with tiny mom-and-pop 3M distributors (3M does not sell direct to installer like Xpel does).  Xpel has MASSIVE scale advantages over these mom-and-pops.  The significantly larger scale not only allows them to have lower costs (and thus more competitive pricing), but being a larger organization also allows them to have the infrastructure needed to provide superior marketing, support, training, software, designs, etc.  Try calling up some independent installers (I've spoken to dozens) and they will tell you that dealing with Xpel is night-and-day relative to the competition.  When you're a mom-and-pop distributor it's very tough to compete with the 800 lb gorilla in Xpel.  And with Xpel growing at a 70%+ rate, the moat just keeps getting wider every day and it allows Xpel to add a few more crocodiles in there.

 

As for the switching costs, every film is a different experience to install.  Once an installer is trained on a particular film they are VERY reluctant to change as working with unfamiliar films causes them to lose money.  When you're used to a particular film like Xpel, you can do the install faster (saving on labor) and with less waste from having to redo portions (saving on materials).  Labor and materials and the primary costs for an installer.  And the actual cost of the film is only 10% of the price of the install job, so it's pretty much impossible to win business away from Xpel by competing on price because any potential modest savings (undercutting them by 10% is only 1% of the retail price of the install) is easily dwarfed by higher labor and waste costs from using a film you're not experienced with.  Installers don't ever switch films unless their existing film is poor quality and generates too many consumer complaints, which is common with 3M installers because 3M film is so low quality.

 

And with 1.6 million of net income this year, with a 50% growth rate next year, that is about 2.4 million. With a market cap of 40 million. That is like 17 2014 earnings. Not exactly cheap. You need to be very sure that they will keep growing at that rate for a few years if you want to make good money on this one.

 

Um, your net income estimate for 2014 is WAY too low.  You seem to have picked 50% EPS growth out of thin air.  TTM EBIT growth is actually 100%, and has never been as low as 50% in the past 3 years!  Furthermore, there is huge operating leverage that was somewhat masked in 2013 by a significant infrastructure investment.  As a result, EBIT growth in 2014 is on pace to be substantially in excess of even the 100% growth they posted in 2013.  With around 70% revenue growth (the rate at which they've consistently grown for the past few years, without the benefit of international expansion that is on the cusp of coming to fruition) they will grow earning at around 145-150%, which is why they will earn around $0.15 in EPS this year.  That's 9x earnings.  And it's not only cheap, but it's absurdly cheap and that sort of massive discount to fair value won't persist when other investors finally figure it out.

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