Expansion In China And New Products Like Windshield Protection Will Unlock Future Market Potential

Key Takeaways

• Expansion into China and key car markets may boost revenue stability through direct business focus and improved inventory management.
  
• New product launches and strategic acquisitions in Asia could expand market share, total addressable market, and revenue growth.
  
• Macroeconomic challenges and operational issues, including tariffs, SG&A growth, and OEM changes, are pressuring revenue growth and financial stability for XPEL.

Catalysts

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

• Expansion into China with changes in sell-in sell-through dynamics and a focus on becoming a direct business in key car markets could lead to increased revenue stability and growth, especially as inventory levels are managed more directly.
  
• XPEL’s dealership expansion efforts, including new offerings and improved partnerships, could enhance revenue growth by capturing a larger market share and increasing content per vehicle unit protected.
  
• Launching new products such as windshield protection and colored films represents an opportunity to expand total addressable market (TAM) and potentially increase revenue streams through upsell and attracting new customer segments.
  
• The acquisitions in Japan, Thailand, and India, along with increased investments in regional operations, provide potential for accelerated revenue growth and economies of scale once fixed costs are surmounted.
  
• Streamlining SG&A and other operational efficiencies could improve net margins as XPEL repositions its cost structure for leaner corporate overhead and better allocation of resources to growth-driven areas.

XPEL Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming XPEL's revenue will grow by 16.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.8% today to 10.9% in 3 years time.
• Analysts expect earnings to reach $71.8 million (and earnings per share of $2.6) by about March 2028, up from $45.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.3x on those 2028 earnings, up from 19.3x today. This future PE is greater than the current PE for the US Auto Components industry at 15.7x.
• Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.11%, as per the Simply Wall St company report.

XPEL Future Earnings Per Share Growth

Risks

• Macroeconomic headwinds, particularly in China and Europe, have negatively impacted revenue growth, resulting in only a 6% increase over the previous year, which may hinder future revenue and earnings growth.
  
• The strong U.S. dollar and potential tariffs are creating an uncertain financial environment, impacting their gross margins and potentially having a negative effect on their revenue growth rate.
  
• SG&A expenses grew by 17.4% due to acquisitions and increased marketing spend, which could pressure net margins if revenue growth does not keep pace.
  
• Inventory management issues and the increased costs associated with a new manufacturing location to mitigate tariffs could further strain financial resources and net income.
  
• Challenges with the sell-in, sell-through dynamic in China and changes in OEM partnerships (e.g., Rivian program changes) have impacted revenue, suggesting potential volatility in revenue streams from key markets.

Valuation

• The analysts have a consensus price target of $46.0 for XPEL based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $55.0, and the most bearish reporting a price target of just $38.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $661.5 million, earnings will come to $71.8 million, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 7.1%.
• Given the current share price of $31.83, the analyst price target of $46.0 is 30.8% 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.