DAP-U.V - Xpel Technologies

[yadayada]

Thanks for the explanation, v helpfull :) .

[educatedidiot]

Well, if you believe management, their revenue mix should flip from (if I'm recalling the #s from their presentation correctly) 70% domestic/30% international to 30/70.

 

Exactly.  And I believe about 1/3rd of that 30% piece is Canada, so international is really only 20% today.  Almost all of their growth over the past few years is being driven domestically.  PPF attachment rates are still only around 2% in the US vs. 60% for window tint, so there's a lot of room for continued high growth right here in North America.

 

That said, the international opportunity is absolutely massive and probably 4-5x the size of the domestic market and is basically all up for grabs.  Xpel is starting to get aggressive with international expansion (they just signed up a German distributor to build out continental Europe) and I think once this really picks up some steam we might see revenue growth accelerate into the triple digits. 

[yadayada]

It seems to be swinging alot tho. Can probably grab it at 1.30 or 1.40 if your a bit patient.

[educatedidiot]

Perhaps, but I wouldn't count on it.  The stock hasn't traded at $1.30 in a month, and the price has been trending up with yesterday's close being the highest close in weeks.  The bid depth is as strong as I've seen it in a long time too, with over 50,000 shares on the bid between $1.45-1.47.  I think investors are slowly discovering this under-the-radar opportunity.  I'm all for getting in at as good a price as possible, but if you're waiting for $1.30, or even $1.40, that wait might end up being like waiting for Godot.  I was able to buy more shares at $1.48-1.49 today FWIW.  That's plenty cheap enough for me.

[snowball82]

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.

 

Very good summary

 

Here a new artice about XPEL & the multi-bagger potential

 

http://seekingalpha.com/article/1994221-xpel-technologies-an-undervalued-growth-machine-with-multi-bagger-potential?source=email_rt_article_readmore

 

 

[yadayada]

Their business model is to sell their database together with their films and offer training to installers, and essentially franchise it out to them. And help them market it to dealerships. I am assuming they have to use Xpel's film to have acces to the database? Do they really need the database and how proprietary is it? What if a similar product came on the market 1 year from now by a better capitalized firm? And they do the same but undercut on price? With such huge potential there is motivation enough. 3m is a large company, can't they easily put alot of capital behind this and just outmuscle xpel here on every aspect?

 

Allthough it seems that even if they get 1 or 2 competitors, hey opened a new very large potential market. So there would be room enough at first, unless a better capitalized competitor rolls out a wave of cheaper franchises.

 

Seems like interviewing a few higher ups at 3m and xpel would really pay off here.

[educatedidiot]

They are not franchising the name and operating procedures....yet.  If a dealer converts to a franchisee, Xpel's profits from that customer will increase by around 3x by my calculations.  So if they convert just 1/3rd of their customers to a franchise model, the company's earnings will literally double overnight.  My $0.15 in EPS this year takes NONE of that potential upside into consideration.  The stock is just simply absurdly cheap at 9x earnings.

 

You don't need to use Xpel's film to use their software and database.  A lot more dealers use their software than use their film.  Upselling database customers to film over time is a source of growth.  You pay less for their software if you use their film, so there is an added incentive to switch over to Xpel films to lower the software/cut fees.  That database is 100% proprietary and is another component of Xpel's huge moat.  They create templates for pretty much every make and model of vehicle.  That's a big fixed cost just to enter the software/database business, and it's prohibitively high for new entrants that have no existing customers.

 

3M doesn't own any of the end customers, they sell entirely through distribution.  They're pretty powerless in this market and that's why they continue to rapidly lose market share.  I already explained why Xpel has a large moat in the prior comment.  There are other details in that comment, but the most important part of it is that they are way way larger than anyone else that is selling direct to installer.  That affords them huge advantages in terms of purchasing scale and fixed cost infrastructure (customer support, software/database, training, etc.).  Xpel probably already has 35% market share and that is climbing rapidly because their primary competitor (3M) has a massively obselete product and sells entirely through mom-and-pop distributors.  It's too late for someone to just try and throw a lot of money at this market, Xpel is simply too entrenched now and has huge barriers to entry and switching costs.

 

As for interviews, I've already spoken to dozens of people in the industry, both at Xpel, their competitors, distributors, and independent installers.  The SEMA aftermarket auto show in particular was very useful last year.  Obviously my opinions on the company are based in part on those conversations.  I encourage others to phone up independent installers and ask them about Xpel and I think you'll quickly come to the same conclusion that I have.

[educatedidiot]

If this was protected by a patent, then i would like the company.

 

It is protected by a patent.  And trade secrets in the manufacturing process.  But the biggest portion of their moat comes from their huge size advantage over competitors.  It's nice to be the 800 lb gorilla in an industry.

 

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

 

There's already at least one comparable product in the market from Suntek, and it's been in the market for a while.  Hasn't put a dent in Xpel's growth.  3M initially created the market and Xpel has since built a business of comparable size.  Everyone else that has tried to enter the market has failed miserably and eventually bowed out due to the large barriers to entry that protect Xpel's business.  And that includes some very large, well capitalized companies in Avery and Llumar (division of Eastman Chemical).  The jury is still out on Suntek. 

 

Personally I think 5 years from now Xpel and Suntek will own the market and Xpel's market share will be even higher then it is today.  And sometime before that happens 3M will be forced to acquire Xpel for the brand, extensive high barrier distribution network, software, proprietary database, best-in-class marketing capabilities, etc.  All of the other window film companies like Avery, Llumar, Suntek, etc are going to want to own Xpel for their distribution network, however, so I expect a fierce bidding war.  At the end of the day though, 3M has the deepest pockets and the most to lose by having Xpel fall into the hands of a competitor, so I think they will ultimately prevail, and the price will probably shock people.  The strategic value to 3M, particularly when you consider how 3M could leverage Xpel's distribution to sell window films as well, is very very high.

[LC]

I'm having a hard time killing this thesis.

 

What are your thoughts on the potential impact of 3M releasing a competing product?

 

At the high end of the market, what are your thoughts on the trend of bulk installs vs kit installs?

[LC]

Another resource to check the price of a competitor's cutting patterns:

http://filmvinyldesigns.com/patterns

 

2014 BMW 5 series runs about $235

[educatedidiot]

I'm having a hard time killing this thesis.

 

I've been trying to kill it for 2 years and I can't.  Single best investment opportunity I've seen in my lifetime with a market cap of at least $20 million.  It checks every single box for me (ultra high growth, very large runway, low valuation on this years earnings, recurring revenues, no customer concentration, expanding margins, huge moat, low capital intensity, smart management, high inside ownership, recent insider buying, catalysts from getting listed on a major US exchange, etc.).

 

What are your thoughts on the potential impact of 3M releasing a competing product?

 

Even if 3M did release a competing product (their existing product is based on 10+ year old technology and is wildly obselete), it will have no impact.  That ship has sailed.  There was an opportunity for someone 3 years ago to introduce a quality product and Xpel took the ball and ran with it.  At this point Xpel already has a product that is effective for the life of the vehicle.  All 3M can do is catch up, and being on par is simply not good enough to win business away, no one is going to switch films for a product that's roughly as good.  It was hard enough for Xpel to win business away and they had a product that was a massive improvement over 3M.  The switching costs will help to protect Xpel's existing business, and 3M's mom-and-pop dealer network has no hope of competing with Xpel for new customers even if they had a comparable product.  3M is the least of Xpel's concerns.  Xpel's only viable competitor is Suntek.  I think Xpel can gain market share over time, but really if Xpel can even just hang on to most of their 35%-ish market share they're going to make a ton of money as the pie grows exponentially from consumer adoption going from 2% penetration to something closer to window tints 60%.

 

At the high end of the market, what are your thoughts on the trend of bulk installs vs kit installs?

 

If you look at the whole market it's actually the exact opposite.  As PPF is becoming more and more mass market, new installers are entering the industry and they are a lot less likely to be the skilled "artisans" that were first movers in offering PPF installation.  The % of kit installs will increase over time, and that is very bullish for Xpel because they make a lot more money selling pre-cut kits than they do selling bulk film rolls.

[LC]

Thanks for your thoughts  8)

[Mackie]

Good discussion thus far.

 

Re: The issue of 3M outmuscling and crushing XPEL - I think it is important to remember how meaningless this business is to 3M in the scheme of things. They are an $85B business and this is just one of their thousands of products. Sure if they can easily design a decent product and push it through distributors ,they will (and they have up to this point). Now when you start talking about offering training seminars for installers, accompanying installers on sales pitches to dealers, attending car enthusiast shows, etc 3M is just not going to put the resources behind an effort like this given the market size. These little things add up for XPEL and all contribute to their brand equity and ever increasing moat. When I spoke to the CEO, he stressed that because XPEL's entire life depends on selling this one product, they can't help but go far beyond what a diversified giant like 3M does. From my due diligence, I learned 3M doesn't even market their product, they just rely on their corporate brand name (which is strong, mind you).

 

The best way to put it into perspective, is to view XPEL as a selling/marketing company and not an R&D company (though they do have robust product development capabilities). Viewed in this light, they stack up quite well against 3M. As has been pointed out, Suntek is their true competitor as they have the most similar business model to XPEL.

 

I recently did a piece on XPEL and posted to my blog (Moatology):

 

http://moatology.com/2014/01/28/xpel-technologies-an-undervalued-growth-machine-with-multi-bagger-potential/

 

Feel free to have a read through for an in-depth analysis of the company.

[fenris]

It is protected by a patent.  And trade secrets in the manufacturing process. ularly when you consider how 3M could leverage Xpel's distribution to sell window films as well, is very very high.

I saw some stuff on Google Patents regarding the cutting/application process. Have you located a patent for the actual film?

[educatedidiot]

It is protected by a patent.  And trade secrets in the manufacturing process. ularly when you consider how 3M could leverage Xpel's distribution to sell window films as well, is very very high.

I saw some stuff on Google Patents regarding the cutting/application process. Have you located a patent for the actual film?

 

Yes I have.  I'm not about to publicly disclose their manufacturing partner for competitive reasons, but a resourceful person can easily figure it out.  In any case, it's not important for several reasons.  Most of the IP protection is in the form of trade secrets anyways, and as I've explained Xpel's moat is in everything else they do (the film is more or less a commodity).

[snowball82]

I recently did a piece on XPEL and posted to my blog (Moatology):

 

http://moatology.com/2014/01/28/xpel-technologies-an-undervalued-growth-machine-with-multi-bagger-potential/

 

Very good summary Macky !

 

Is there an almost perfect correlation between the number of installers and distributors vs rising incomes?

 

 

[mbrock77]

10K is out, in case anyone is interested:

 

http://www.xpel.com/relations/default.asp

[jouni1]

doesn't seem to scale at all. sales almost double and operating margin stands still. that said, if they double sales and profits for 2 more years, this might be reasonably valued.

 

on the other hand material costs are a huge portion of overall costs (88%) . what materials are these? are they benefiting from cheap oil and gas?

[yadayada]

income from operations doubled? while revenue went up 70% Maybe you didnt take taxes into account?

[educatedidiot]

The business is massively scalable.  SG&A is fixed not variable here, and the increases have helped to drive even more revenue growth.  Over the last few years the company has increased revenues organically by 4x while they only increased SG&A by 2x over that same period.  Operating margins expanded in 2013, and they will continue expanding in 2014.

[snowball82]

67% revenue growth versus prior year

89% pre-tax net income growth versus prior year

 

I know some here think it is not a value investment but growth continue and the company has more cash than ever.

 

 

[yadayada]

I think people grossly misunderstand what a value investment is. By that definition you could call only things that are trading under net cash a value investment. My definition is:

 

An asset that has a preferably large discount between the value it can generate in the forseeable future, and the value the market thinks it can generate.

 

Looking at this idea, that seems to be the case. If you bought walmart at 40x earnings more then 30 years ago and held onto it untill now, you would have done 23% annually. So having this fixed idea in your head that something trading at 20x earnings could not possibly be cheap is very limiting. It can be a bit more difficult to analyze, but discounting it just on this before you have done any analyzing can be costly.

 

I think in this case there is also plenty margin of safety because of their proven growth % already, high return on capital and the market they can capture.

 

If they have one more good growth year like they had this year, then this thing is trading at 10-14x earnings. Since there is also some leverage in their growth. So revenue has to grow less this year then last year to double earnings.

 

And let's say in 2015 revenue only grows 10% a year instead of a staggering 70%, there is still leverage in their earnings (since it is unlikely competition in this area will be heavily on price) and it would also be fairly valued at the current price, and you wouldn't lose much. So there is your downside, which doesn't look bad.

 

But that is unlikely, because the market for this is simply so huge, with the convincing value proposition (and execution) this company has. And the numbers have clearly shown that. Looking at where their competition is, and how large the market is, it simply looks unlikely they cannot sustain this really nice growth for at least another year.

 

So your basicly buying a stock at 10-14 earnings that could be fairly valued, with the option of like 50%+ (conservatively) growth per year.

 

So I think a valueinvestment doesn't necesairily have to mean a 15 or 20% FCF yield.

[snowball82]

I agree, so we can expect hight growth continue. Xpel has a moat with products/network/software. Here an interesting article from Detroitnews :

 

http://www.detroitnews.com/article/20140508/AUTO03/305080032/Film-product-protects-car-s-paint-gives-matte-finished-look-same-time

[yadayada]

Few remarks. It seems that if you search online on forums etc you mostly see people talking and recommending xpel.

 

And secondly, it seems that the installers sell this stuff to the people coming in for a PPF. If they got it from Xpel they are inclined to tell people that xpel is better then the competition, to prevent them from going across the street to the guy who installs suntek. Also seems from reading lots of comments taht installers either say suntek is best or xpel (depending on what they sell). So the more xpel they sell, they more they also convince themselves that xpel is better. Does that sound right? That should add to the stickiness and barrier of entry.

 

Kind of see that effect myself when i write or tell someone about a stock. When you are selling them, you also turn yourself more irrationally positive on the stock.

 

finally, they are more expensive then suntek. This should work in their advantage because this is a lasting protection thing on people's car. And compared to the car it is not that expensive. And since you need it to protect your expensive item, you want the best thing right? It is a long term purchase. So the same principle with bose and any other overpriced brand. If it is more expensive, it is probably better (what people think anyway, it is probably the exact same as suntek?).

 

[snowball82]

Few remarks. It seems that if you search online on forums etc you mostly see people talking and recommending xpel.

 

And secondly, it seems that the installers sell this stuff to the people coming in for a PPF. If they got it from Xpel they are inclined to tell people that xpel is better then the competition, to prevent them from going across the street to the guy who installs suntek. Also seems from reading lots of comments taht installers either say suntek is best or xpel (depending on what they sell). So the more xpel they sell, they more they also convince themselves that xpel is better. Does that sound right? That should add to the stickiness and barrier of entry.

 

Kind of see that effect myself when i write or tell someone about a stock. When you are selling them, you also turn yourself more irrationally positive on the stock.

 

finally, they are more expensive then suntek. This should work in their advantage because this is a lasting protection thing on people's car. And compared to the car it is not that expensive. And since you need it to protect your expensive item, you want the best thing right? It is a long term purchase. So the same principle with bose and any other overpriced brand. If it is more expensive, it is probably better (what people think anyway, it is probably the exact same as suntek?).

 

Announce about a new product, significant addition?

 

http://finance.yahoo.com/news/xpel-now-offers-tracwrap-temporary-174200241.html