Some stocks are well known in value investing circles, even though they are anything but a classic value stock. XPEL, Inc. (CVE:DAP.U), a company specializing in paint protection films for cars, has been written up twice on VIC, once in 2013 and again in 2015. There is a long thread about it on CoBF, people write about it on Twitter and there are plenty of articles on SA as well. With a market cap of ~$185 million XPEL is a tiny company, but it is remarkable well-known in certain circles. But with the stock trading at a 37x P/E and 10x P/B-ratio while it’s up almost 400% this year it sounds like an unlikely candidate for me to investigate.
Share price: $6.54
Shares outstanding: 27,612,597
Market cap: $180.6 million
Enterprise value: $180.9 million
P/E (ttm): 37.1
EV/EBITDA (ttm): 20.8
P/B (mrq): 10.0
Based on these simple metrics above XPEL is anything but cheap, but what this doesn’t show is the extremely impressive growth the company has been experiencing. The company had revenues of $6.0 million in 2011 while revenues for the last three months alone were a whopping $28.9 million. That’s a compounded annual growth rate of more than 50% for six and a half years straight! Even more impressive is that all this growth was accomplished with almost no increase in share count, minimal debt levels, and while fighting a lawsuit against 3M (settled last year). An overview of the historical income statement is shown below:
While these numbers are pretty impressive, the last two quarters have been even better: revenue grew in the first half of 2018 with more than 80% compared to the first half of 2017, while realizing a 3 percentage points higher gross margin. And too be honest, that was about time. Because despite the impressive growth the past years, the operating profit of the company was a bit disappointing. In 2013 the company earned about $2 million on $18 million in revenue, and 4 years later it was still earning $2 million on $68 million in revenue. Growing revenue is great, but in the end it’s about earning money. But once you have a lot of revenue, increasing your margins a little bit does wonders for your profitability.
Valuing a growth company is never easy, but in my experience they are usually so expensive that no matter what kind of model I produce, I have a very hard time justifying the current share price. So I (almost) never end up buying anything that can be classified as a growth stock. But with XPEL it’s remarkable easy. We don’t have to make a fancy model that projects (high) growth rates a decade forward. Really all that is needed is to assume that the company can grow revenues by 35% for two years in a row while maintaining its current gross margin. Considering the historic growth I think that’s a pretty low hurdle to jump over. I have no idea how far growth can continue, but if you can grow for 6.5 half years at more than 50%, while growing at 80% in the last half year, I’m sure there must be quite a bit of runway left.
Asumme at the same time that there is a bit of operating leverage in the “Selling, general and administrative costs” and that these will grow a bit slower than revenues at 25% and the following picture is painted:
With the stock currently trading at $6.54 that means that you can buy this rapidly growing company at just 10.8 times its earnings in two years time.
What I like about XPEL is that insiders own a decent chunk of the company. The CEO owns 5% of the outstanding shares while various members of the board of directors own another 35%. Surprisingly enough, the company doesn’t pay its executive officers with options. The number of outstanding shares increased with 7% since 2012, from 25.8 million to 27.6 million, but not from options or other share based compensation. The reason for the increased share count was a private placement in 2017 at $1.43/share (then the current share price). Most of the shares in the private placement were issued to certain directors and officers of the company, and in hindsight these were for sure issued at an opportunistic time, just before the settlement with 3M. It leaves a bit of a bad taste in my mouth because there didn’t seems to be a pressing need to raise cash at the time. At the same time, I wouldn’t be complaining if the company would have paid twice the amount in share based compensation throughout the years…
Some people think that as a value investor you have to buy stuff like net-nets and stocks trading at a single digit P/E-ratio. While I often like companies like that, the only thing that matters is whether or not something is cheap. Sometimes a stock trading at a single digit P/E-ratio is expensive if for example bankruptcy is around the corner, and sometimes a stock trading at an almost 40x P/E ratio is cheap if revenues are expected to grow explosively. I think XPEL is one of those stocks. How fast it is growing is really amazing, yet the stock is surprisingly affordable.
Of course, it’s not without risks. There are all the “normal” risks like growth slowing because of higher market penetration or a downturn in the economic cycle and people stop buying cars. But I think the biggest risk is basically that this is more or less a one product company. They are growing fast because they have a great product (their ultimate paint protection film was introduced in 2011). I don’t have a car, so I don’t really know how useful it is, but the numbers speak for themselves. But what happens if some company, lets say 3M, creates a superior product? Can they still thrive, or would business slowly deteriorate until nothing is left? That’s the big question. If you pay a high price you not only need XPEL to grow the coming years, it also needs to be a good business 10 years and probably 20 years from now. A lot can happen in such a timeframe.
That said, I couldn’t resist picking up some shares. I don’t think XPEL is a sure thing (it never is), but at the same time it’s just too cheap to ignore considering the absolute fantastic growth.
Have you considered the fact that the reason you are modifying your investment style is b/c there is a lack of traditional value (i.e. net-net, low p/b) stocks? Would you say you have a margin of safety owning this stock?
I wouldn’t say my investment style is being modified. I have always believed that anything can be a buy at the right price. That doesn’t only apply to ugly money losing stocks with questionable management, but also fast growing stocks like this. As long as I think it’s cheap relative to what it should be worth.
That said, I think it’s a good question to think about. Shifting to different stocks because what you used to know is expensive could obviously be a troubling sign. I don’t think that’s the case here, even though I will admit that finding cheap stocks is now not as easy anymore as when I started this blog. Stuff certainly has become more expensive on average. But I still manage to find classic value stocks. And sometimes there is something that grows fast, and I think it’s more than reasonable priced.
With regards to a margin of safety: I think the most important thing is simply buying stuff for less than it’s worth. That’s the best margin of safety you can have. Of course, the trouble is that you have to be right. And secondly, you have to size positions based on their risk profile. Something that even in the most adverse scenario can only drop ~25% in intrinsic value could be sized a lot bigger than something that could easily go to minus 100%. And this certainly falls more in the last category than the first. But it’s never a reason to pass on something.
Hi, alpha. Nice write-up. I’m not against growth stocks per se, but from a quick read I still have some doubts about this one:
1. Are you sure 10x fwd PE is really cheap considering all the uncertainity involved? We’re talking about an auto company, in the end: cyclicals usually have PEs in the very low teens at the peak of the cycle and negative earnings at the through.
2. Since the margin or safety here is all in the company delivering the promised growth and then some, I guess the real problem is in the moat, which is quite dubious for a one-product auto company.
3. Have you valued the company with a DCF? What is it worth in your opinion? If you say 10x PE in 2 years is cheap, you expect it to trade at a higher multiple by that time: like 20x? 15x?
Thanks a lot :-).
1. I don’t think you should think about this like an auto company. Those companies are extremely capital intensive, have high fixed costs and high operating leverage. So when car sales drop their profitability totally plummets. But that doesn’t describe XPEL. Their business is actually capital light, with high margins and high return on equity. When sales go down they probably can still be nicely profitable instead of quickly heading into bankruptcy. That’s a HUGE difference.
2. I’d say: the numbers don’t lie. If you can grow this fast organically for so many years you must have something that is pretty good. And sure, if they would have 10 awesome products that would all grow like this that would be better than if they have only one. So you would have to size this position more conservatively compared to the hypothetical company with 10 awesome products. Secondly, if you think about it, aren’t there a huge amount of companies that are basically a one product company? Even Apple is basically a one product company. They would be nothing without the iPhone.
3. Not really, you could get any number out of that if you would want to project cash flows for more than a few years in the future. But yeah, I would certainly expect that this would trade way higher than a 10x PE ratio if they manage to grow revenues and earnings as projected in my simplistic model. I don’t think a 20x multiple at that point would be overly aggressive. Growth wouldn’t suddenly stop, presumably, and a 10x multiple is basically a zero growth multiple.
I guess I am perplexed about the timing of this recommendation . The stock is up a considerable amount and begs the question about when you got involved. We all appreciate financial bloggers sharing there investment ideas and should do our own do diligence but the timing here raises my antenna. Thanks.
1. This blog post isn’t a recommendation in any way or form.
2. I wish I would have gotten involved in this name a long time ago… but no, your antenna is malfunctioning…
As a long time lurker on this blog I have to say I am also perplexed by your reaction that insinuates that this is some kind of a pump and dump scheme.
Maybe it is better to point at flaws in the analysis or provide us with your insight on what you think should be a fair value of the stock?
Great post. As far as your question regarding the product quality is concerned: you should definitely read some posts on the ‘tintdude’ forum. I don’t think that Xpel necessarily has the best product.
However, I think their strategy to focus on the installers (training them, providing them with the cutting software and pattern databases, providing them with leads via the Xpel website) gives Xpel a moat in the sense that each product needs to be installed by a trained installer. Having the installers on your side seems very important in this business. A competitor that solely focuses on the product will not be able to beat Xpel imo, even if they manage to create a superior product.
Did you manage to visit the Xpel subsidiary in the Netherlands?
Thanks for your comments. I think you are right that switching isn’t frictionless, and that the product isn’t just the film but the whole package, including software and training. But the question is of course how big that moat really is. I’m sure their competition also understands that it’s not just about making a good film.
And no, I have never visited the Dutch Xpel subsidiary. Have you?
You could indeed question the moat as most aspects are replicable by competitors. I for instance read recently that 3M hired one of Xpel’s lead designers to enhance 3M’s pattern database.
As I’m from Belgium, I did not yet visit it either, but I hope to go there in the near future!
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Intriguing idea / analysis. Amazes me that somehow there can be innovation in the auto aftermarket business which totally takes off like this.
My main gripe as I consider the author’s analysis is thus: what’s the difference between buying XPEL and, say, buying Facebook? FB has grown faster and has much higher margins than XPEL and is currently selling for a much lower multiple of earnings. Thus, one could extrapolate — the way the author of this article has — growth out two years and conclude something similar.
I’m not saying XPEL doesn’t merit an allocation (indeed, growth and value are merely two sisters joined at the hip as Buffett has quipped), but I think addressing what makes this a better investment than another high growth, decent multiple business is what would bolster the thesis. Is it lesser downside? Is it lower market penetration? Is it longer runway? etc etc
Maybe FB is a great investment as well, I don’t know, haven’t looked at it in depth enough to really make a meaningful comparison. Their growth in revenue has been impressive, but I imagine that their growth in other metrics such as daily active users or time spent on their platform is a lot lower. Everybody in the world is using it already. But perhaps people thought that 5 years ago as well… But too be honest, I don’t think making a comparison like that is really that useful. A stock should be valued on its own merits.
Great post. How do you get comfortable with their relationship with Entrotech and the fact that it is not their film they are selling and at the end of the day they are just a distributor (admittedly with a brand)? If Entrotech pulls the plug on the relationship one day their business potentially isn’t worth much?
This is a fantastic question and it’s the main reason this was a small “special situation” type (obviously underpriced with catalyst) investment for me.
That said, they do have one barrier: database of film shapes and cuts for a wide range of vehicle types / brands. And it’s not clear that entrotech is a monopoly.
XPEL: anything but your average return