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I used to own a 2004 Mini Cooper. Burgundy.
She was a thing of beauty and the best car I ever owned - you can rip me apart all you want, but Mini Coopers are cool. Even my grandmother agreed.
But after only a few months, I found the damage to the front end of my sweet Mini was intolerable. Rock chips on the rough toads of northern Canadian had torn the hood to pieces. It broke my heart, and I sold her to save myself the pain of seeing her in such a state.
If only I had known then about a company called XPEL (Ticker: XPEL), one of the world’s leading providers of solutions to problems like I had with my Mini Cooper - paint protection films for vehicles. Car fanatics and dealerships alike swear by the products and their ability to protect vehicles from damage.
While XPEL specializes in their paint protection films, they also offer a number of other products, including software for film installers, car window tints, and films for office units and residential homes as well. But it hasn’t always been a smooth growth runway for XPEL, which was forced to claw its way back from near bankruptcy and pivot its business model entirely in order to survive.
Even as I write this, XPEL is yet again surrounded by question marks on its ability to survive. Tesla recently announced it would be ending its business relationship with XPEL on the heels of its own foray into offering PPF. Shares have tumbled since.
Is it a buying opportunity? Or a red flag warning investors to stay away? Let’s take a look at the company as it stands today, including XPEL’s company history, business model, management team, and the industry they operate in, before getting into the investment potential. If you’re looking for my thoughts on the recent announcement, skip ahead to ‘The Investment’ section.
*Disclaimer: I am not a financial advisor, planner, analyst, or any other certification related to finance. This article, and everything else from Hourglass Investing, is intended for research and entertainment purposes only. Please don’t make any investment decisions based solely on what you read.*
**Disclaimer: I do not own shares in XPEL**
XPEL - XPEL 0.00%↑
As of Writing:
Market Cap: ~$1.3bn
Gross Margins: 41%
5-yr ROIC: 44.4%
Revenues: $356.3m (+21% YoY)
The XPEL of today is nearly unrecognizable to the XPEL of the company’s early days. Founded in 1997, XPEL has grown from being exclusively a provider of automotive design software to a leading player in automotive protective films - think paint protection films to protect from rock chips, window films/tints. In 2018, they also expanded into home and office window films to protect from heat and sun damage or provide security, and in 2019 they expanded into ceramic coatings for cars as well. And while they still offer the software that the business was originally centred around, the brand is better known for its paint protection film (PPF).
If it seems like a strange pivot from software to automotive products, you’re not wrong. Their Design Access Program (DAP) software provided automotive installers with film designs for paint protection. Gibberish, right? Well, imagine an installer has a client with a BMW come in looking for a paint protection film (PPF). These things don’t come stock - they need to be precisely molded to look seamless on the model. So that installer would use the DAP to draw up the exact design required for that BMW, get it pre-cut and then be able to install it with less time and effort and with a better fit overall.
But after struggling for a number of years, growing very little, and being extremely strapped for cash just before the Great Financial Crisis, XPEL took a good, hard look at the business and realized that the software by itself wasn’t an ideal business. The company pivoted towards providing their own paint protection films in addition to the initial software offering.
In 2009, the former CEO stepped down to be replaced by Ryan Pape, who had worked at the company previously and was now tasked with heading up a desperately needed turnaround story. The country was in a sorry state from the GCF and XPEL itself was on the verge of bankruptcy. Pape somehow managed it though, and further pivoted the business into PPF, with a greater focus on establishing brand, opening their own installation centres, diversifying their product mix, and implementing acquisition and global expansion strategies. All this was done with an underlying strategy of placing the business as close as possible to direct consumers.
Over the years, this business pivot, in combination with Pape’s leadership, have helped to evolve XPEL from a less than $50m micro-cap listed on the Toronto Venture Stock Exchange to a company worth more than $1bn on the Nasdaq. The company now has global operations, with a presence across North America, Asia, and Europe and a diversified geographic revenue mix.
Shareholders have been rewarded beyond their wildest dreams as well, with XPEL generating returns of more than 4000% (>24% CAGR) since 2006. It’s the sort of company every micro- and small-cap investor dreams of finding. But despite all this success, shares of XPEL have been hammered over the last month, falling more than 33% on concerns over the business’ moat and capacity to continue growing.
Company Grade: A-
In essence, XPEL’s business revolves around the selling, distributing, and installation of paint protection films and window films, which they purchase and license the right to sell from the initial manufacturer.
XPEL’s business model can be widely segmented into two revenue generating streams - Product Revenue & Installation Service Revenue. Below is the rough makeup of each segment taken from XPEL’s most recent quarter’s investor presentation.
This is where XPEL generates the majority of its revenues at 85% of the total rev mix. This includes direct sales of their automotive products to new car dealerships and independent installers, as well as indirect sales of their products through distributors around the world. Also included in product revenues are home and office window tint installations, which are called architectural window films.
Employees at authorized installation and dealership centres are encouraged to get XPEL certified to install PPF and window (car & architectural) films and use the Design Access Program software effectively.
Revenues in this segment are heavily concentrated in XPEL’s specialty, with paint protection films accounting for around 62% of total revenues. A further 15% comes from automotive window films & tints, and another 2% from architectural window film.
Finally, the Design Access Program, DAP, which XPEL licenses out on a SaaS model, makes up a further 2% of total revenues.
The last portion of XPEL’s revenues come from their installation services.
Installation Service Revenue
As part of XPEL’s strategy of placing themselves closer to their customers, the company began operating their own wholly-owned installation centres to serve both new car dealerships and direct-to-consumer applications. They also offer installation services on-site for car dealerships, and some of their installation centres have expanded to provide architecture film installation as well. XPEL has also wormed its way directly into some manufacturing facilities (OEM), allowing their products to be placed on vehicles fresh off the press.
XPEL’s employees, like the dealership employees, are able to get certified as an XPEL installer.
This segment makes up for the remainder of XPEL’s total revenue mix at ~15%, and though it’s a smaller portion of revenues it is an important segment for XPEL to be able to develop brand awareness.
Automotive Protection Film
XPEL’s bread and butter, and the source of most of the business’ revenues.
The majority of their protection films are focused on paint protection films (PPF) for vehicles, which help protect paint jobs from rock chips and other damage. This is a huge value add for end-use customers, such as those that are looking to protect vintage/premium cars or those trying to protect the aesthetic value of an off-the-lot car after purchasing.
The PPF essentially serves as a disposable layer that takes the damage in place of the car body. While XPEL offers “self-healing films” that are able to return to a brand-new look after being damaged, after a time (3-7 years) they too start to show damage - when this happens, that PPF can be peeled off and replaced, leaving the body underneath pristine and untouched.
These films come in a range of different lines, including the standard clear and “self-healing”, as well as hydrophobic and temporary films.
Beyond the more basic PPF, XPEL also offers films for specific environments, such as a heavy armour film for off-roading & industrial use, and films designed for Chinese vehicles and road conditions in China - though, for the life of me, I could not find any information on how conditions in China differ drastically enough to warrant a specific product line.
XPEL also offers anti-microbial films for screens and other electronics (again, this is mostly targeted towards cars, this time in the interior), and window films that block heat to keep vehicle interiors cool. In addition to cars, they offer PPF for boats and bicycles as well.
Architectural Protection Films
Adjacent to the automotive PPF, XPEL also offers their architectural window films - this line is mostly focused on films that block sunlight to help keep home & office interiors cool, privacy films, which let light in but aren’t see-through, and security films which protect against window damage. They also offer anti-graffiti and decorative films.
The architecture film segment is still a mostly untapped market for XPEL at just 2% of total revenues, but considering they only added this segment of the business in 2018 I suspect that there’s still plenty of room for further growth.
Design Access Program (DAP)
Despite the business pivot towards offering direct film products & services, XPEL continues to offer their software on a SaaS model as a central part of their value proposition. This is a database of >80K films designed for specific vehicle and window shapes, from hoods to the tiny areas around the door handles. The database is updated as new vehicle models are released.
Using the software, installers can find the film for the specific part and model of vehicle. The software is linked to a cutting machine, which is then able to make an exact cut based on the selection, in turn saving installers time and wasted material from manually cutting their own products while also ensuring a precise fit.
This is another section of the business that, though it doesn’t generate a ton of revenues, is important in making PPF more accessible and cost-effective for independent installers and dealerships and in making operations more efficient in XPEL’s installation centres. It’s also a key part of how XPEL differentiates itself in a crowded market.
In addition to their main products, XPEL also offers a range of miscellaneous products that show up as ‘Other Revenues’ on their balance sheet. These revenues include:
Installations tools for dealers and installers (squeegees, gels, cutters, etc.)
Care products - interior and exterior cleaners, PPF sealants, car care kits, etc.
Swag - hats, sweaters, jackets, stickers, lanyards, sunglasses, and much more.
Yes, clothing is a pretty random segment for XPEL and obviously not a huge part of their revenues. However, expanding brand awareness is one of their top capital allocation priorities (more on this in a bit), so it makes some sense to give people the chance to wander around repping the brand. The tools and care product sales to dealers and installers make a ton of sense as well, as they allow XPEL to serve as more of a one-stop-shop and save their customers having to go elsewhere for these adjacent products.
XPEL has been ramping up its acquisition rate over the last several years in order to continue growing the business, expand their offerings into architecture films, and expand their brand internationally. 2021 was a particularly busy year for them, with XPEL acquiring invisiFRAME, a designer and manufacturer of PPF patterns for bicycles; permaPlate, a window film installation and distribution company; and 5 installation businesses targeting mid-range dealerships.
In 2022 they acquired an Australian based distributor and installer of PPF, and in 2023 they purchased another Texas-based installer to bring their total acquisition count since 2020 to 11.
While I do like this strategy by XPEL in theory, it does add some risk as they don’t have a proven track record of savvy acquisitions. If they turn out not to be fantastic acquirers of businesses, they could end up getting hit pretty hard by this growth strategy, either through dilution, impairment charges, or expensive financing. Just to further this risk, I find it especially concerning that 2021, a year of heightened valuations, was their year of gung-ho acquiring - though admittedly, they only spent a combined $20m between all their acquisitions excluding invisiFRAME (price was not disclosed for this acquisition).
The primary customers that XPEL sells their automotive PPFs to are distribution companies, installation centres, and new car dealerships, who then sell to vehicle owners, the ultimate end-consumer. With their in-house installations, XPEL can skip this intermediary step and install directly for end-use customers themselves, but this is still a relatively small part of the total revenues.
The end-use customer themselves are either people trying to protect the value of their newly bought vehicle, or people who really care about cars. Vintage cars, race cars, kitted-out vehicles with no muffler revving at red lights, etc. For any of these customers, PPF is a must-have - it’s money well spent to protect their precious vehicles from harm. Body work can be very expensive, making PPF a huge value-add for anyone that cares about keeping their vehicles pristine.
As for the architectural films, XPEL’s primary customers in this segment are people trying to keep their home or office interiors cool and protected from the sun, though they have some market for their anti-graffiti and decorative films as well.
There are lots of different PPF options out there, and there’s nothing particularly differentiated about XPEL’s specific films. So how is it they’ve managed to be so successful?
The Design Access Program is XPEL’s competitive advantage, a value-add that allowed them to distinguish themselves from their competitors that either don’t have as large a database as XPEL or any sort of software platform. DAP allows installers to save time, money, and material while making the entire wrap more efficient, making XPEL’s software platform and subsequently their PPFs an obvious choice for installers.
However, this competitive advantage is quickly disappearing - other companies have figured out the advantage the software can bring and made their own platforms, which are now in use at different dealerships and install locations.
Business Grade: C+
Nothing spectacular nor anything terrible for XPEL’s Glassdoor rating - while it’s typical to see mixed reviews at larger companies, XPEL has fewer than 1000 employees, so it would be more encouraging to know that people enjoy working there. This is especially true since many of XPEL’s PPF installers are skilled and require training before they’re able to do their job efficiently, making it that much more important to create a workplace that they want to remain a part of.
Still, at a 72% overall rating and 78% approval of CEO Ryan Pape, it doesn’t seem bad enough to drive employees out in droves. XPEL’s Glassdoor rating certainly doesn’t get it any bonus points in ‘The Team’ grade, but it doesn’t dock any either.
In contrast to the Glassdoor rating, XPEL received the Top Workplaces 2023 Award in San Antonio based on employee reviews gathered through a third-party surveyor. So at the very least, XPEL’s San Antonio workplace, which is where XPEL is headquartered and the majority of their employees work, represents a strong company culture.
To say Ryan Pape bet it all on XPEL would be an understatement.
Pape worked at XPEL from ‘04-’08 as a tech specialist before leaving the company. A year later, in 2009, he returned as CEO. XPEL at the time had 15 employees, $3.8m in revenues, and was unprofitable on top of getting crushed under the weight of mounting debts.
It was also in the middle of a lawsuit for patent infringement - Pape maxed out his personal credit card to settle the lawsuit, then purchased shares of XPEL at $.05 per. I’d call him a lucky bastard, but luck really has nothing to do with it.
As CEO over the last 14 years, he has been instrumental in driving the turnaround towards becoming the company I’m talking about today, which is largely unrecognizable from the one he initially took over. How he actually got here, I have no idea, since he started out his career with a bachelor of science at the University of Texas. Partly this is attributable to no one else wanting the CEO job when he took over, as he himself has mentioned, but it’s also partly because of Pape’s work ethic.
For his first 5 years at the helm of XPEL, he worked long hours and put the work in to learn every part of his business inside out. That’s the sort of dedication you look for in a CEO, and it’s not the only way that Pape has aligned himself with shareholders. He’s worked hard to grow in a balanced approach without diluting the stock, owns a significant amount of shares himself (~4%), and his compensation package is very reasonable to boot:
At ~$800K total compensation with bonus included, Pape earns well below the average $5m CEO salary of companies of similar size.
Pape isn’t reinventing the wheel or anything, but XPEL doesn’t really need it. The company just needs to deliver on its growth strategies, and Pape has proved himself very capable of doing just that over a long tenure. I think shareholders are doing alright with Pape heading up the company.
The three members of the management team to be focused on are Pape, already discussed, and Barry Wood & Mathieu Moreau. Wood joined in 2016 and serves as XPEL’s Chief Financial Officer while Moreau came to XPEL in 2015 and holds the position of SVP of sales & product.
Wood holds both an MBA & a CPA, and got his start at Ernst & Young where he served as an audit manager before moving onto an executive finance role at AT&T and later a CFO position at a pharmaceutical delivery company. Nothing too special to report on Wood, to be perfectly honest, but none of his former companies seem to have done too poorly during his time there.
Moreau joined the company through XPEL’s acquisition of Parasol Canada and Protex, both companies founded by Moreau. At the time of the acquisition, Protex had 75 franchises across Canada and Parasol was XPEL’s largest international distributor. Moreau has a ton of experience, having been in the automotive industry since 1991 - exactly the sort of person you want in charge of sales and products.
XPEL’s management is allocating the company’s capital towards continued growth, both in the power of their brand and in revenue generators:
Expand Non-Automotive Product Lines
I like that management is prioritizing growth in brand awareness - for products that face strong competition and may not seem very differentiated to most consumers, like XPEL’s products, branding becomes even more important.
To this end, XPEL has done a good job of focusing ad placements in media that are getting consumed by their target customers (car nerds) and making their brand visible at car-related events: they serve as the lead sponsor for Team Penske at NASCAR racing events and hold the naming rights to XPEL 225, a race circuit used in NASCAR’s truck racing series. The company is also a member of the BMW, Porsche, Audi, and Mercedes Benz car clubs, which helps to boost their visibility with brand-specific installers and end-customers.
XPEL follows a similar strategy with their architectural films, where they’ve partnered with a TV show called Designing Spaces to showcase their window films and tints in interior decorating processes. They also enlisted Team Penske driver Scott McLaughlin to advertise the architectural films on McLaughlin’s own house. This was a sneaky but brilliant marketing move to help extend the existing brand reputation with car customers to awareness of the architectural products as well.
XPEL’s other capital allocation priorities make perfect sense to continue growing the business - expand globally and continue scaling in the 10 countries they operate in, both organically and through acquisition, as well continuing to develop the non-automotive products. I really like management’s growth-focused investment strategies here.
XPEL certainly isn’t an uncovered gem with 66.7% institutional ownership. This high level of institutional interest typically results in heightened valuations that make it harder for self-directed investors to find an entry point with reasonable upside. However, 22.5% ownership by insiders is an encouraging sign that management is aligned with shareholders.
In all, a bit of a mixed bag at a surface scratch on the ownership structure. For current investors, it’s great to see the alignment. For prospective investors looking for a bargain, it’s less great to see the interest XPEL is getting from institutions. So for some extra colour, let’s take a peep at whether those insiders view the current valuations as attractive:
The answer is a resounding no, with a side of red flags. Insiders have sold fat sums of shares since November, with no buys. Clearly, insiders are not seeing the share prices anywhere north of $65/share as any sort of a bargain, pointing again to the heightened valuations that come with high institutional ownership.
Of note amidst all this insider selling is the end-of-August sell by Barry Wood, XPEL’s CFO and arguably the most qualified person in the world to see that XPEL’s shares are overvalued. The second most qualified person to do so is Ryan Pape, and he has also been selling a significant amount of shares since the end of August (not shown in the above picture). Pape has sold off a little more than 12K shares between the end of August and beginning of September in the range of $75-$83/share.
Now I will throw in one caveat here: most of these sells are from one director in particular, Mark Adams, who retired at the end of June and was likely just exiting his position as he stepped away from a company he no longer helps to make decisions for. Nonetheless, both the CFO and CEO have been selling shares along with other members of the management team, suggesting they don’t believe there’s much upside in the $65+ range.
Team Grade: B-
Paint protection films are still a somewhat nascent industry - there’s not a lot of awareness of them apart from dedicated car fans and dealerships installing them on newer vehicles. That is a big part of the reason behind XPEL’s capital allocation priority to increase brand and product awareness.
It’s also why XPEL has reacted quite positively to the announcement that Tesla is offering PPF for their own vehicles - an initial catalyst for the recently cratering stock price (more on this later though!). Just the fact that Tesla, an obviously much larger and more influential brand than XPEL, is offering PPF should help to increase awareness towards protection films and their uses. XPEL’s management is convinced this increased product visibility will still be good for their company in the long haul, even if they lose revenues to Tesla in the short term.
In the wider global industry, Asia Pacific is supposed to experience the fastest growth, with China and India both serving as huge potential markets for PPF with relatively low but quickly growing per capita car ownership. Wider global trends have meant increasing growth in transportation via car and thus car ownership, which should serve as a tailwind to the automotive industry and subsequently XPEL as well.
However, one negative here in XPEL’s industry is the current trend towards walkability and away from car-centric planning in urban development. Many cities around the world are now focused on making their cities more transit- and pedestrian-friendly to encourage less car-intensive use. An example of this is downtown London, where Mayor Sadiq Khan implemented a tax on vehicles driving in a certain zone in an effort to make it more transit-oriented. These sort of efforts are going on in urban development plans the world over, particularly in developed markets like Canada, Europe, and the U.S. - some of XPEL’s largest market bases.
Total Addressable Market (TAM)
The global PPF industry is estimated to be worth ~$560m in 2023 with a CAGR of 6.2% through to 2030 to reach ~$850m. The Asia Pacific region was estimated to account for ~$240m of that market in 2022, while other developing countries make intriguing growth opportunities for their low base of automotive ownership.
I’ve talked a lot about car ownership in discussing XPEL’s TAM because it’s an important barometer for XPEL’s ability to continue growing, alongside broader awareness of PPF. Within the automotive industry, the U.S. is a very established market, while Mexico, India, and China are some of the largest growth markets.
The global architecture film market is a different conversation entirely - it’s a much larger and more mature market at $3.2bn, but also subsequently growing much slower at a 4.6% CAGR to get to $3.45bn by 2029. Given that only 2% of XPEL’s total $356m - around $7m - comes from architectural films, this is basically a completely untapped market for them and provides an attractive potential growth runway for them.
Tesla started offering PPF for their newer vehicles recently - this was the initial catalyst that spooked investors and caused the shares to drop so dramatically. However, to my mind, there’s an even greater risk in PPG & Entrotech that has also contributed to the mass exodus away from XPEL stock, with more to come, in my opinion. XPEL is also facing a ton of competition in the PPF space from other larger and more developed players.
Tesla vehicles reportedly account for ~5% of XPEL’s total end-use revenues. While management tried to brush off Tesla’s move into the PPF market as being good for awareness of PPF products in general, they will not as easily be able to brush off 5% of their revenues disappearing. There’s also some very compelling research from Culper Research that this 5% figure could actually be much higher and that XPEL is actually much more reliant on business from Tesla vehicles, which are notorious for their crappy paint quality. Even at 5% though, that is a pretty significant chunk of revenues and a big growth trend for XPEL that’s walking out the window.
More concerning, this points to a lack of both complexity required for and differentiation in their products. If it’s that easy for an auto manufacturer to up and decide to start offering PPF, there just isn’t a ton of defense or competitive edge to XPEL’s business model.
To be clear, Tesla isn’t a direct threat to XPEL’s business model, but rather a significant chunk of its portions. It’s also quite likely that XPEL will continue generating some business from older Tesla vehicles even if they lose the newer, off-the-press vehicles. But a threat is a threat.
3M is a $50bn company that seems to have their fingers in every pot, including PPF. While XPEL has differentiated their products from 3M’s in the past via their DAP, 3M committed the resources to building out the 3M Pattern and Solutions Centre, which functions identically to the Design Access Program.
Beyond the software, 3M’s model for PPF is identical - sell to dealerships, installers, and distributors while encouraging 3M installation certification so that installation centres are more likely to carry their products.
Eastman is a similar story to 3M - a much larger company ($8bn) that sells PPF and recently began developing its software database more in order to defend their market position. Their Core software serves an identical purpose, and their business model is very similar, though they also have a more diversified product line that includes a wide range of chemicals.
I’ll stop beating the drums after this one. Go figure, Suntek is another PPF seller, distributor, and installer with software and an identical business model for offering PPF.
The difference here is that Suntek is actually smaller than XPEL and is a private company.
Entrotech & PPG
Now let’s get into the good stuff - Entrotech is the real threat to XPEL here. Entrotech has served as XPEL’s main supplier of films throughout its business history, licensing out exclusive rights to sell Entrotech’s film products. Now, the supply issue isn’t my main concern here - they can lock down another supplier easily enough, and there are some whisperings they’ve already entered into an agreement with a supplier in India to continue supply products.
No, the real risk here is what Entrotech is doing instead of selling to XPEL - Entrotech entered into an agreement with PPG, a massive paint and industrial applications company, to begin developing a protective paint together. This paint would combine PPG’s automotive paint with Entrotech’s protective properties, creating a product that automotive OEM facilities could work directly into the initial manufacturing process.
This would entirely skip over the need for XPEL’s after-market solution and render their business model almost entirely moot. There would be little demand for XPEL’s PPFs, or any other brands for that matter, as this would be a huge time and cost saver for end-consumers and for dealerships to have the PPF directly installed before even making it to the lot. Dealerships would save significant ordering, installation, product, and cutting costs, while end-consumers could drive off the lot with an already ready-to-go product.
Not a lot of information has been released on this new paint, but supposedly it’s already in use at one of the major car manufacturers. If it turns out to be effective, the others will undoubtedly follow suit and XPEL will be mostly screwed. They would still have demand from existing cars in the market, vintage car collectors, etc., but XPEL would entirely lose the market in any newly produced vehicles or OEM installations.
Industry Grade: C
At a Glance:
TTM EPS: $1.8 (+43% YoY)
TTM Revenues: $356m (+21% YoY)
EBITDA: $71.8m (+39.9% YoY)
Total Shares Outstanding: 27.6m (+0% 5-yr CAGR)
Free Cash Flow: $34.7m (+55.% 5-yr CAGR)
Interest Coverage Ratio: 42
Balance Sheet: The Good
There’s a lot to like on XPEL’s balance sheet, and not very much to hate.
Growing Cash Flows
Free cash flow came in at $34.7m on TTM figures, including $27.4m in the most recent quarter. XPEL has had significant growth in free cash flow over the last 5 years with a more than 55% CAGR over that period.
XPEL has followed a very disciplined approach to growth, choosing not to raise capital through stock issuance. The result is next to no dilution at only 7% over the 14 years since Pape took over in 2009. This is fantastic for shareholders, as it not only proves that management is aligned with shareholders but also demonstrates the future capacity to continue growing EPS at a decent clip.
Healthy Debt Profile
With an interest coverage ratio of 42 and a Net Debt/EBITDA ratio of 0.2x, XPEL is easily able to cover expenses from debts. The debt ratio sits at only 0.1x, meaning XPEL’s total assets far outweigh their total debts. Finally, the debt/equity ratio hovers around 24% over the last 5 years, showing that the capital structure is clearly very oriented away from debts and more towards equity financing. In the current macroeconomic environment, less reliance on debt is a good thing to see on a balance sheet.
While the debt/equity ratio increased to 45% and 34% in ‘21 and ‘22 respectively, it’s since come back down to 19%, which may indicate that XPEL was taking advantage of lower rate environments to grow via debt and have since balanced this back out to not get caught under interest expenses. If so, it was a very strategic move.
Fantastic Capital Efficiency Metrics
5-yr averages for returns on equity, capital employed, and invested capital all sit at >40% figures, while returns on assets sits at an also very respectable >20% mark. These kinds of returns on XPEL’s previous investments are fantastic evidence of the effectiveness of the company’s growth and to realize profits from their capital allocation strategies.
However, it should be noted that these metrics are all backwards looking; while they prove management’s historic capacity to grow, which may get carried into the future as well, they don’t guarantee future returns on investments.
Not only is XPEL’s margin profile very attractive, but margins have also been steadily ticking upwards since 2018, with >10% compounded growth rates on operating, EBITDA, and net profit margins, plus a sweet 7% CAGR on gross margins. Rising margins are one of the top things I look for in a business to show they aren’t facing commoditization of their products or getting priced out by competitors.
Balance Sheet: The Bad & The Ugly
Low R&D Spend
R&D is critical to maintaining a competitive edge, and is an expense most businesses swallow to continue improving their products. XPEL seems to think that no improvements can be made to their products and subsequently spends barely a dime (relatively) on R&D.
While management would know better than I do if improvements can be made to paint or window films, I see this as complacency. Feel free to disagree with me on this (nothing else though, just this), but I love to see operating expenses getting funneled into R&D to prove companies are still focused on innovation and the company’s future, as well as sustaining their competitive advantage.
It’s a dog-eat-=dog world out there, and R&D investments ensure you’re not the dog getting eaten. XPEL, based on recent announcements, may already be behind the eight ball, but more on this later.
Rising SG&A Expenses
Speaking of operating expense, XPEL’s SG&A expenses as a percentage of net revenues has been slowly ticking up at a 3.2% CAGR over the last 5 years, climbing from 19.7% in 2018 to 23.4% in the last twelve months. To add to this, growth in SG&A expenses have outweighed growth in revenues since 2021. This is never ideal, as it shows XPEL is having to spend more to continue growing revenues and they aren’t able to acquire much growth without marketing expenses (through word of mouth, for example). However, given their focus on increasing brand and product awareness, this isn’t necessarily surprising.
Declining Capital Efficiency Metrics
While the 5-yr averages on capital efficiency metrics are fantastic, XPEL has also seen across-the-board declines in returns on invested, employed, and total capital, as well as assets and equity. I love to see growth in these metrics for the same reasons I like to see these metrics high in the first place; they demonstrate the returns XPEL is earning from their investments.
The fact that these are declining across the board suggests that their more recent investments have generated lower returns or that previous investments are becoming less profitable as time goes on. Given that XPEL has cranked up their acquisition rate in the last few years, it’s likely that these more recent acquisitions have generated lower returns, possibly because of heightened purchase valuations that many acquirers faced over the last several years.
Key Performance Indicators (KPIs)
Given that XPEL is very much in the growth phase still, tracking revenues and their sources is very important in monitoring the growth story. These are the most important metrics to watch with XPEL:
As this is XPEL’s primary product and the bread and butter of the business, as well as the segment of their business most at risk at the moment, current shareholders of investors interested in XPEL need to monitor the revenues and growth from PPF.
I believe the window revenues are one of the most important to monitor, as the growth of their non-automotive architectural products will reveal XPEL’s success in diversifying its products. Unfortunately, XPEL’s reporting for the window segment also includes car window films, so a little extra digging is required; the company’s 10-K’s show how much of their revenues are coming from the window segment.
Similar to PPF, installation is one of they key existing segments of XPEL’s business, so continuing to ensure this KPI isn’t losing revenues is the main task for investors.
The international revenues are another very important metric to watch. This is going to be a significant part of their growth story going forward, especially in order to keep up with their larger competitors that have more international presence.
Defense & Offense
Defense is how XPEL can maintain its current market position, while offense represents XPEL’s growth opportunities. Many of XPEL’s growth or ‘offense’ opportunities are covered in the Capital Allocation section under ‘The Team’, so I’ll keep them brief. The defense, unfortunately, isn’t super strong and is probably one of my biggest question marks with this company.
Expand Internationally - Offense
XPEL’s current revenues are very concentrated in the U.S., China, and Canada, with the U.S. also serving as their fastest-growing industry. The U.S. is a very huge market so it’s good to see them still growing fast there, but expanding their business internationally will be key to continued growth once they’ve fully penetrated the domestic market.
Grow Brand Awareness - Offense
As I mentioned earlier, PPF is not a very well-known product - growing both awareness towards the benefits of PPF and XPEL’s brand will be a huge growth opportunity to further penetrate the total auto market and get PPF installed on a greater number of the cars sold and driven around the world.
Diversify Products - Offense
Given the potential growth in architectural window films and the concentration of XPEL’s revenues in automotive PPF, diversifying not only has the potential to provide them with a nice extra stream of revenue but also makes them less reliant on or exposed to the automotive industry as a whole.
Rollup - Offense
I always like acquisition/rollup companies - XPEL has been ranking up their acquisitions by acquiring several of their international distributors over the last number of years to help grow their global presence.
The only potential concern with this pathway to growth is that XPEL doesn’t have a history of being an acquirer or of folding companies into their existing operations efficiently. It’s not as easy as it sounds, and overpaying for companies or failing to amalgamate efficiently could lead to goodwill impairment charges or reduced capital efficiency metrics (which we’ve seen, so there’s some evidence this may already be the case).
DAP - Defense
A significant part of XPEL’s competitive edge is founded on their Design Access Program - the films themselves are mostly indistinguishable between brands. However, the cost savings and efficiency that accurately pre-cut films provide to installers and dealership services is a huge distinguisher, and something that XPEL was way ahead in providing compared to their primary competitors.
However, it’s not necessarily a complicated software, and therefore not a very strong form of defense. Even if other companies like Eastman were late to the punch, they have the resources to catch back up, and they now have, with software of their own in use at dealerships.
Nor are XPEL’s third-party distributors required to use the DAP by any means, so there’s not even an exclusivity factor here - installers can carry XPEL’s film products but still choose to use the Eastman software if they so choose. There’s not a ton of difference between the software programs or their effectiveness, as the entire software is just founded on measurements of pieces of vehicle - not exactly complicated. So long as all the software platforms are good about maintaining an extensive database with all the latest vehicle models from all the brands, there’s really not a ton of difference. I’ll be honest, this is defense, but not strong defense by any means.
Relationships with Dealers & Installers - Defense
XPEL does have a pretty wide network of distributors and installers that purchase their products, both in the U.S. and globally. They also host an annual event to hand out awards to their dealers of the year in various categories, from ceramic coating to PPF to architectural films, which definitely helps to build some extra brand awareness and relationships.
They also offer XPEL certifications for dealer/installers to get trained on the software & installation techniques, but supposedly this is not required to carry or install the products. There’s also no exclusivity in the arrangements - dealers/installers can easily carry films from multiple providers, and many do, and there are no long-term purchase agreements in place. Relationships can be helpful, but they only go so far, especially with very few guarantees in place to protect XPEL. Again, I see this as a pretty weak form of defense.
Now let’s get into the actual investment potential before I wrap this article up, make a final verdict on my interest level in the stock, and hand out grades.
Based on TMM figures:
FCF Yield: 2.6%
PEG Ratio: 0.6x
Despite the huge plummet in share price, nothing about XPEL here is screaming cheap. Certainly it’s cheaper than it was, but by no means dirt cheap. XPEL is still a fast-growing business, so the price may reflect the growth. A PEG ratio of 0.6x based on TTM EPS growth would suggest it is even cheap based on the level of EPS growth, and an EV/S of ~4x for a business ramping revenues at >20% over the last twelve months also makes the current valuation look very reasonable.
However, for a business that could face major disruption from Entrotech and a serious drop in revenues and/or revenue growth as a result of Tesla PPFs, this valuation may still seem pretty rich. If the next quarter’s results come out with negative or significantly lower revenue growth, the current valuations would still look very expensive as analysts adjusted their numbers to reflect a new (and gloomier) growth model.
If the impact from Tesla’s revenue loss is significant and Entrotech’s protective paint gets adopted in the major car manufacturers, XPEL can kiss the good days goodbye. Over a 5-yr holding period:
I assume a 7% CAGR in revenues through to 2028, mostly driven by car enthusiasts and other pre-owned cars that aren’t getting manufactured with protective paint, as well as architecture films. The revenue slowdown is largely attributable to loss of OEM and Tesla revenues.
Net profit margins decline to 9%
P/S ratio sinks to 2x on slower revenue growth, P/E sinks to ~19x on slowed EPS growth.
This would have XPEL making $499m in revenues by 2028 and $44.9m in net income, giving EPS of $1.63.
With EPS of $1.63 and a P/E valuation of 19x earnings, the share price would equal roughly $31/share, a decline of ~37% and an absolutely terrible investment.
If the impact from Tesla’s revenue loss isn’t that significant and Entrotech’s protective pain turns out to be ineffective, then shareholders who buy XPEL during this down period will likely be laughing. Over a 5-yr holding period:
I assume a 15% CAGR through to 2028 as XPEL continues selling to OEM and older Tesla models, growth is driven by acquisitions and international expansion, further penetration into architecture films. Growth is somewhat slowed by loss of newer Tesla’s, but not a significant or business-changing headwind.
Net profit margin growth slows, but continues to increase to 15%.
P/S continues to hover around 6.5x (TTM figure), P/E around 35x (5-yr average P/E is 45).
By 2028, XPEL would be making $716m in revenues and $107.4m in net income for EPS of $3.89.
Given these figures, the share price would be roughly $136/share, which would make deliver a fantastic 22.4% CAGR for shareholders buying at the current price of $49.55.
Just to make this somewhat more cautious, I also modeled out a scenario with a more conservative P/E of 25x, which still delivered a market-beating return with a 14% CAGR through to 2028.
Had the announcement from Tesla and the risk of Entrotech not just come to light, I’d be leaning more towards the conservative bull case here - but they did just come to light, which throws a huge wrench into any sort of models, and forces me to lean more towards the bear case. To my mind, the risk from Entrotech and Tesla makes this a very binary investment decision from here: it either goes really well or really terrible. There doesn’t seem to be an in between.
Exactly two analysts follow XPEL stock and hand out their ratings. From the Nasdaq website, those two analysts issued estimates on XPEL’s 1-yr targets at the beginning of September. Both rated shares a Strong Buy, with one estimating a price target of $104 (+110% from today’s share price) and the other $97 (+95.8%).
Either figure would offer some pretty significant upside to the current price, but keep in mind that both these ratings were made before Tesla announced its new foray into PPF and concerns over Entrotech emerged. Also note that analyst ratings are short-term in nature and analysts are human, and therefore often wrong, like the rest of us.
Risks to Share Performance
Disruption to PPF
Significant losses from Tesla
Increased competition to Design Access Program
Decreased automotive sales from a tougher macro-economic climate
Higher insider ownership
Excellent balance sheet
Growing margins and cash flows
Decreasing capital efficiency
Investment Grade: C+
The Short Story
XPEL has had incredible growth over the last 15 years. Shareholders who got in early should be very happy with their results, even with the more recent sell-off. However, past results guarantee nothing.
While the team is experienced and headed up by a very dedicated CEO, Ryan Pape, the business model is not terribly attractive - XPEL relies on film and PPF suppliers with exclusive licensing to XPEL for their products while only selling, distributing, and installing the films themselves. In essence, they are simply a very large, multi-location installer/dealership service that faces lots of competition and potential disruption with a very flimsy competitive edge that they don’t spend much on maintaining.
They may find success as a rollup firm of smaller dealership and film distributors, though they have no proven track record of consolidating in quantity effectively. They also have lots of opportunity for growth through international expansion, growing brand/product awareness, and diversifying their products into the much larger architectural window film market.
The balance sheet is more a bright star in XPEL’s story - the company has seen some fantastic growth in margins, free cash flows, EBITDA, and EPS without diluting shareholders and while maintaining a very limited amount of debt - though this debt aversion may actually be hindering their growth somewhat.
The investment story is incredibly risky - XPEL faces the risk of a pretty significant downturn and slowdown in growth if Tesla is successfully able to offer PPF on a wide scale. The much larger risk, however, is the threat of competition from Entrotech’s protective paint - if automotive companies begin implementing this paint directly into their OEM processes, then XPEL’s business model is mostly screwed. It would completely subvert the necessity of XPEL’s after-market installation, which would save end-customers time & money while delivering an initial product that they’re happier with. That would be all the difference in destroying XPEL’s business and future growth potential.
That’s where weak defense and lack of a significant competitive edge or innovation come in to bite XPEL, in my opinion. They would still have business from vintage car collectors to install on pre-owned vehicles, but most if not all of XPEL’s OEM and dealership services would be rendered obsolete, forcing them to rely on an architectural window film segment that isn’t yet very developed.
More or Less Interested
There are just enough red flags, in combination with some still-heightened valuations, to scare me off XPEL. I don’t believe they have a very differentiated product, and their competitive advantage seems, at best, flimsy (filmsy?) and with no R&D expenses they certainly aren’t producing any new advantages. While the company has lots of further growth potential, that growth will depend on their ability to defend their current market position.
I don’t believe they have enough defense to grow into the future without a ‘leaky bucket’ scenario, in which for every customer XPEL acquires, they also lose one. This would make growth incredibly inefficient and cause further expansion of SG&A expenses as a percentage of net revenues, in turn destroying operating margins and having fairly significant negative impact on the business.
There are still some items to like about XPEL, but I don’t believe it’s currently priced to factor in the potential risk. If the price drops more and I can see reasonable upside even while factoring in increased competition, leaky bucket growth, etc., then I’ll be interested. But for now, there are more attractive opportunities available in the market and my vote is on less interested.
Final Grade: B
That’s all for XPEL folks! Happy investing and stay safe out there.
I’ll be back at you in two weeks diving into DentalCorp - a Canadian small-cap play that is grossly undervalued and underappreciated while still growing fast.
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