Critical Expansion And Diversification Poised To Propel Revenue And Margins

Key Takeaways

• Strategic expansions and product diversification, including windshield protection films and a new line in China, aim to boost revenue through wider market reach.
  
• Acquisitions and a new OEM partner program are designed to enhance service revenue, deepen market penetration, and improve net margins through operational efficiencies.
  
• Dependence on aftermarket and international markets poses risks to revenue growth, alongside challenges from rising operational costs and uncertainties in new initiatives.

Catalysts

Sells, distributes, and installs protective films and coatings worldwide.

• The expansion into new markets and the strategic push towards product diversification, especially with the addition of windshield protection films and a mid-tier product line in China, pointed towards an increase in revenue streams from both new product offerings and heightened market penetration.
  
• A new OEM and partner referral program leverages XPEL's installer network to facilitate product installations, potentially increasing the company's service revenue through an expanded customer base and enhanced OEM partnerships.
  
• Strong dealership business growth, particularly in the U.S., suggests higher future sales and possible improvements in net margins due to volume efficiencies and strengthened dealership relations.
  
• The strategic acquisitions, such as Protective Film Solutions and the distributor in India, indicate both geographical expansion and deepening of product and service offerings, expected to result in increased revenue in underpenetrated or new markets.
  
• Improvements in gross margin performance, alongside effective management of SG&A expenses, hint at the potential for better net margins and cash flow, driven by operational efficiencies and prudent cost management.

Assumptions

• Analysts are assuming XPEL's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.6% today to 13.7% in 3 years time.
• Analysts expect earnings to reach $71.9 million (and earnings per share of $2.39) by about September 2027, up from $47.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.4x on those 2027 earnings, which is the same as it is today today. This future PE is greater than the current PE for the US Auto Components industry at 19.3x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.15%, as per the Simply Wall St company report.

Risks

• The significant decline of 45.7% in revenue from the China business could indicate challenges in international markets, potentially impacting overall revenue growth.
  
• The reliance on the aftermarket which remains off its trend from the prior year, suggests vulnerability to economic downturns, which could affect revenue predictability and growth.
  
• A 20.5% increase in SG&A expenses indicates rising operational costs which, if not matched with proportional revenue growth, could pressure net margins.
  
• The new product launches and OEM referral programs, while potentially beneficial, carry execution risks which could impact the expected revenue and earnings if they do not meet uptake expectations.
  
• The strategy to acquire distributors in key markets increases SG&A and operational complexity, posing risks to operational efficiency and profitability if the integration and expected benefits do not materialize as planned.

Valuation

• The analysts have a consensus price target of $55.0 for XPEL based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $526.3 million, earnings will come to $71.9 million, and it would be trading on a PE ratio of 25.4x, assuming you use a discount rate of 7.1%.
• Given the current share price of $43.54, the analyst's price target of $55.0 is 20.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.