As many of you already know, DAP.U or XPLT is my largest position at 60% of my portfolio. I was expecting to see 50% YoY revenue growth and 4 cents EPS. Turns out XPEL only grew 35% YoY ($11.3M in revenue) and made 2 cents EPS (net income up 1.68% YoY). While it was below my expectations and other investors's, it was by no means a bad quarter and there were justifiable reasons why those targets were not hit. In fact, it was a very decent quarter, but expectations were simply too elevated. The only reason it's down so much is because the stock is illiquid and a large number of investors were looking to exit at the same time after their expectations were not met. It's absurd how cheap the stock has become as it currently trades at ~1.4x annualized Q2 revenues for a company still growing at 35% YoY. I still continue to hold my full position because the fundamentals have not changed; a few minor external factors are holding the business back but it's temporary and this happens to any company one day or another -- it's an unavoidable reality and hence why a little diversification is necessary when investing. It's also the reason why I invest in stocks for at least 3 to 5 years.
Without further ado, I will share my notes from the conference call:
- Reasons for slower growth:
- YoY decline in China sales. In Q4 2014, management reorganized their distribution strategy in China. Instead of selling to many distributors, they cherry picked a few of them in order to create a more orderly and structured market, and enhance the XPEL brand. It was short-term pain for long-term gain. Management expects China revenues to start growing YoY again as early as Q4.
- Distributors destocked (kept lower inventory levels) because they wanted to hedge against forex exchange. They will eventually have to bring inventory levels back to normal whether the US dollar strengthens or weakens. Hence, this is only a short-term issue. Adjusting for this temporary destocking impact, revenue growth would have been ~50%.
- Currency exposure decreased their sales and net income as the company reports in USD and they didn't raise prices yet to offset the exchange rate. It mostly hit net income, causing the company to miss out on an additional $300k in net income had the dollar remained at similar levels as last year.
- Don't expect a faster growth rate for Q3. 35% is still a very good growth rate IMO.
- Gross margin (currently 30%) and net income margin will start improving if the US dollar weakens or when they will inevitably have to raise prices if the US dollar remains the same or strengthens.
- SG&A increased 21% YoY and decreased 25% sequentially. That's good news since they will benefit from more operating leverage when the growth rate increases in the future.
- Window tint products still in "soft launch" phase in the US. Will start ramping up throughout the year. It's a good product for their clients to sell to generate extra revenue.
- Next generation PPF film should be out early next year. It's still being tested with customers. It will have a few enhancements, but won't be a complete overhaul.
- Training classes are still full which bodes well for future growth and the demand for PPF products.
- They will have a presence in the Netherlands by the year end. They are taking their time to break into the rest of Europe as they want to seek out top talent. Once again, this is a short-term pain for long-term gain. The CEO admitted that the UK was not the best entry point for Europe, however he chose this destination because they already knew the people there and were comfortable working them.
- New account management portal for dealers which will make the ordering process smoother. The portal will be available on mobile as well.
- New website will be launched in Q4.
In short, the business is still very solid. The unexpected events (namely the strong USD and distributor destocking) and the calculated business decisions which caused short-term pain but will bring long-term benefits are the reasons we didn't see a 50% growth rate and net income was only up 1.68%. There's just no valid reason the stock should be trading as such prices. Too bad I don't have any dry powder left, otherwise I'd be buying as much as I could.
Link to conference call transcript: http://seekingalpha.com/article/3479186-xpel-technologies-xplt-ceo-ryan-pape-on-q2-2015-results-earnings-call-transcript?page=2