Update: XPEL Technologies

Here are my notes from the Detroit microcap conference for Xpel Technologies:

  • Still confident that China will start growing YoY again starting in Q4.
  • NASDAQ uplisting in 2016. Already working on it.
  • Already raised prices slightly in Canada by 4-5%. Waiting for competitors to raise their prices before doing another price hike especially since they just started in Europe and won’t look good if they immediately raise prices after entering a new market. It’s not really the end users who feel the pain of price increases since the film is only 25% of the cost of the installation. It’s the installers who will have their margins squeezed a bit.
  • The reason why the penetration rate is so high in western Canada is because that’s where they first started marketing. It just goes to show how that it takes a bit of time for traction to gain in new markets, but when it does, it is explosive.
  • He wants to more direct presence internationally and more operation centers to create awareness in the market.
  • Starting to do shows in the UK. Already did 2 this year. This is an integral part of their marketing strategy which has worked really well domestically.
  • Still looking to increase margins. Couldn’t tell me his internal target, but I would assume it’s around 15% for their operating margin.
  • Before having a direct presence in Canada, distributors were fighting for the same accounts, like we saw in China. Only China was worse. They were competing at cost.
  • Trying to develop internal metrics to know what the real PPF penetration is. He wasn’t yet confident enough to share those metrics. The challenge is accounting for the difference between full wraps and partial wraps.
  • Asked Ryan if he felt 15% growth in the underlying PPF market was about right. He thinks it’s higher than that. He sees it as 15% growth just from the existing independent installers, then you have to add on new installers and new dealerships picking up the product.
  • Eastman’s market share: he has an idea of what it might be. He says Xpel is currently 40% but plus or minus 20% margin of error. Eastman he says 20-25%, but again with a big margin of error.
  • Not aware of any new entrants in the past 18 months that are gaining ground. He has seen window film companies launch a PPF product but describes them as ‘’me too’’ products.
  • Reiterated how operating an install shop actually increases business for the other install shops in the region. Looking at more deals like the one in Atlanta.
  • Last time they looked at churn in their installer base, excluding bankruptcies, it was below 5%.
  • Switching costs: direct costs are not that high, they can start buying film from a competitor easily. It’s the long term opportunity costs that are high. The ones that switch will do it for a lower priced product, but they usually come back to Xpel because they realize it comes at the expense of lower service.
  • Why doesn’t Suntek increase their price? It’s how they started off selling window film, really low prices to gain market share. He thinks it’s either an intentional strategy or they just don’t know how to do it another way.
  • Asked if manufacturing their own film gives Eastman a competitive advantage. He says they don’t really manufacture it. Everyone gets their urethane from the same source and urethane accounts for the bulk of the film. Suntek does the laminating and adhesive coating. To the extent that they can capture additional margin by doing this, they could reduce selling price. He admits this is an advantage, but it may also come as a disadvantage because a lot of manufacturing companies have trouble being good service companies. 
  • On the window film, Xpel is able to get very good pricing from suppliers which partly explains why the gross margin will be strong. The fact that window film is commoditized works to Xpel’s advantage since switching costs are so low, it will be easier to get clients to switch to Xpel.
  • At the next SEMA they will unveil a new ‘’colored’’ paint protection film. Urethane mixed with paint. He said it is a very expensive product and cutting edge. It’s meant to displace coloured vinyl in certain applications where vinyl does not weather well. It will provide the benefits of paint protection with colour personalization.

In conclusion, XPEL still remains my largest position and I think it's extremely cheap as it currently trades near 1.2x Q2 annualized sales. With the international opportunity and China revenues that will start growing YoY again in Q4, the company can easily keep growing at a minimum of 35%. I'm thinking 50% is very doable. Therefore, the stock is incredibly cheap. Furthermore, the moment the company completes its uplisting, it will start trading a lot higher IMO. Stocks on American exchanges generally trade at premium multiples in comparison to Venture listed counterparts.