Thanks for writing this article. I always appreciate serious opinions on XPEL even if they differ with my own. As a substantial long-standing shareholder of XPEL, I share your concern about multiple contraction, and indeed, expect multiple contraction to act as a headwind in the coming years. OTOH, I think you might be underestimating the opportunities for growth in XPEL's core PPF, flat glass architectural film, installation services, etc. These factors may more than compensate for multiple contraction and power XPEL to a strong risk-adjusted return. I must admit that I find your "owners earnings" adjustments more than a bit puzzling; however, I cannot pass judgment because you don't share the specific details required to reduce earnings to 94x "adjusted owners earnings." Perhaps you are expensing acquisition related intangible assets and/or goodwill aggressively? If so, may I suggest that in the case of an acquisition such as PermaPlate imo that is quite wrong; if anything, the intangible value of PermaPlate has grown even though PermaPlate-related earnings were depressed due to the new car shortage. Again, thank you for the article. - Jason Hirschman
Thank you for your comments. We each have different opinions and that's what makes a market.
Don't misunderstand me, XPEL is a wonderful company with a fantastic CEO. I like the company and it is the kind of business that I would invest in... at the right price.
Price is so important.
You acknowledge that multiple contraction will act as a headwind which is the same as saying that the future success of the business is already baked into the price. In such circumstances, even if fundamentals improve, as an investor today you will see little or no benefit because that meat has already been stripped off the bone.
I always use Microsoft as a case study. It traded on a ridiculous multiple in 2000. Anyone buying then (or holding then) saw negative return for year after year and only broke even on the investment 15 years later despite it being a sterling business that kept growing top and bottom line at a healthy rate year on year. Take a look.
The XPEL multiple is crazy. It is up over 16,000% in the space of only a small number of years. Really? How much has revenue and profit increased over that time horizon? How can the valuation run so much faster than fundamentals? It can't. It's become a meme stock. Almost as silly as the Tesla multiple in recent years (and look what happened to that).
In terms of my adjusted earnings, it is a variation on what Buffett calls owner earnings. It is a more finely tuned free cash flow metric.
To understand a company some significant adjustments need to be made as you probably know. I have my own way of doing that. It doesn't matter if you agree with my method or not, if I use the same method for my before and after earnings to calculate the multiples, then the methodology largely cancels out.
In short, XPEL is on my watch list, but it needs to fall a significant distance before I pull the trigger.
If you are a holder and have done well with this stock, now is probably the time to cash in your chips. Tesla shareholders wish they had done so a year ago! You'll have a chance to get back in at a better level and at least you can put your money to work in the interim.
Disclaimer: Not investment advice, just my considered opinion. I may be wrong. Please make your own decisions and seek professional advice if necessary.
My pleasure. I reference Microsoft in my earlier response to you and that inspired me to write a new Substack on the topic. This is very pertinent to our discussion around XPEL. Please take a look and let me know what you think
Thanks for writing this article. I always appreciate serious opinions on XPEL even if they differ with my own. As a substantial long-standing shareholder of XPEL, I share your concern about multiple contraction, and indeed, expect multiple contraction to act as a headwind in the coming years. OTOH, I think you might be underestimating the opportunities for growth in XPEL's core PPF, flat glass architectural film, installation services, etc. These factors may more than compensate for multiple contraction and power XPEL to a strong risk-adjusted return. I must admit that I find your "owners earnings" adjustments more than a bit puzzling; however, I cannot pass judgment because you don't share the specific details required to reduce earnings to 94x "adjusted owners earnings." Perhaps you are expensing acquisition related intangible assets and/or goodwill aggressively? If so, may I suggest that in the case of an acquisition such as PermaPlate imo that is quite wrong; if anything, the intangible value of PermaPlate has grown even though PermaPlate-related earnings were depressed due to the new car shortage. Again, thank you for the article. - Jason Hirschman
Jason,
Thank you for your comments. We each have different opinions and that's what makes a market.
Don't misunderstand me, XPEL is a wonderful company with a fantastic CEO. I like the company and it is the kind of business that I would invest in... at the right price.
Price is so important.
You acknowledge that multiple contraction will act as a headwind which is the same as saying that the future success of the business is already baked into the price. In such circumstances, even if fundamentals improve, as an investor today you will see little or no benefit because that meat has already been stripped off the bone.
I always use Microsoft as a case study. It traded on a ridiculous multiple in 2000. Anyone buying then (or holding then) saw negative return for year after year and only broke even on the investment 15 years later despite it being a sterling business that kept growing top and bottom line at a healthy rate year on year. Take a look.
The XPEL multiple is crazy. It is up over 16,000% in the space of only a small number of years. Really? How much has revenue and profit increased over that time horizon? How can the valuation run so much faster than fundamentals? It can't. It's become a meme stock. Almost as silly as the Tesla multiple in recent years (and look what happened to that).
In terms of my adjusted earnings, it is a variation on what Buffett calls owner earnings. It is a more finely tuned free cash flow metric.
Too many people rely on Income Statement earnings and traditional financial reporting which is, frankly, no longer fit for purpose. I recommend you to read: https://www.wiley.com/en-gb/The+End+of+Accounting+and+the+Path+Forward+for+Investors+and+Managers-p-9781119191094
To understand a company some significant adjustments need to be made as you probably know. I have my own way of doing that. It doesn't matter if you agree with my method or not, if I use the same method for my before and after earnings to calculate the multiples, then the methodology largely cancels out.
In short, XPEL is on my watch list, but it needs to fall a significant distance before I pull the trigger.
If you are a holder and have done well with this stock, now is probably the time to cash in your chips. Tesla shareholders wish they had done so a year ago! You'll have a chance to get back in at a better level and at least you can put your money to work in the interim.
Disclaimer: Not investment advice, just my considered opinion. I may be wrong. Please make your own decisions and seek professional advice if necessary.
I appreciate the thorough and quick reply. I'll definitely check out the Wiley link you provided. Wishing you the best in your future endeavors.
My pleasure. I reference Microsoft in my earlier response to you and that inspired me to write a new Substack on the topic. This is very pertinent to our discussion around XPEL. Please take a look and let me know what you think
https://rockandturner.substack.com/p/rule-1-price-matters