Xpel Technologies (DAP.U, $1.05) sells paint protection film that goes on the front of cars to protect them mainly from rock chips. Paint protection film is a clear and very thin polyurethane-based material that is virtually invisible once installed. From Q4 2011 to Q1 2015, they recorded an incredible 14 consecutive quarters of at least 50% revenue growth (almost all organic). Not surprisingly, Mr. Market thought very highly of this growth and Xpel’s stock was often priced around 40-50x earnings. Inevitably that growth slowed down the past few quarters (although it remains over 30%) and the stock took a beating as a result. To top it off, on December 30th 3M (who owns one of their competitors) filed a patent infringement case against Xpel and the stock dropped another 50% on New Year’s Eve alone. It’s traded in that ballpark since. There’s a lot to say about Xpel so I’m breaking it up into two posts. This post covers all the main stuff (business overview, competition, management, etc) and then part two will review the lawsuit.
3M invented the original paint protection film in 1960 when its first application was to protect helicopter blades, followed by NASCAR stock cars in the 1980s. A natural extension from there was to make a film to protect everyday automobiles. The problem with the first many iterations of paint protection film (PPF) is that they yellowed over time (and some lower end films still do today). No one wants to put a “clear” film on the front of their car that turns yellow over time—that’s ugly. But it all changed in 2011 when Xpel released their Ultimate film which was lightyears ahead of the other films available at the time. One installer I talked to put it like this: “Xpel made the first real film and everyone’s been copying it since.” It’s not a coincidence that incredible streak of revenue growth I mentioned began in Q4 2011, not long after Ultimate’s release.
Being the first mover (in terms of premium films) allowed Xpel to build a brand and a following in the car industry. Even today, I’d say they are the only PPF with a true brand name. If someone has heard of PPF (outside of those in the industry), it’s almost always Xpel. Numerous installers who don’t even use Xpel film have commented that they get calls all the time from people wanting Xpel because it’s the only film those people know. I talked to one installer who thinks Xpel’s main competitor, Suntek, is a better product, but he still installs Xpel more because that’s what his customers request.
Xpel is a little unique (in the US at least) in that they sell directly to installers as opposed to through distributors. This allows them to develop a much closer relationship with their clients and by almost all accounts, Xpel provides fantastic customer service. Another benefit of this is that Xpel actually knows who their clients are (the install shops). Others, like Suntek, sell through distributors so they really don’t know their clients. If I’m about to buy a new car that I want to protect, I’d probably go online and research the best PPFs on the market and come up with Xpel and Suntek. Going to Xpel’s website, I click the dealer locator and find installers near me that use Xpel. This service also lists which ones have been trained and certified by Xpel which makes me more confident in their abilities. Next, I go to Suntek’s website to find local installers and… well I don’t find shit because Suntek doesn’t really know who’s installing their films. I reached out to Suntek to find local installers and while they eventually gave me some names and numbers, it was a multi-day process that very few people are going to bother with.
This stuff makes a difference by the way. Almost all Xpel installers I spoke to get a meaningful amount of business through Xpel’s dealer locator. None of the installers would quantify the number for me (probably because they don’t know), but I’d estimate from their comments that 10-30% of their sales come through Xpel’s website. To be listed on Xpel’s website, an installer has to buy at least $1,200 in film per month from Xpel. If you’re an installer using the most popular film and you get 20% of your business from Xpel’s website, would you risk getting kicked off that list to switch to a new film that is less known and less proven?
Xpel also sells film cutting software called DAP (some of their competitors sell software of their own). If an end user wants the hood of his 2016 Corvette Z06 covered, the installer punches that into DAP and it cuts the film in a way that perfectly fits that Z06. While Xpel and Suntek are in close contention for best premium film on the market, there doesn’t seem to be any dispute over the best software—and that’s Xpel’s DAP. There are a lot of installers that don’t use Xpel’s film, but they use DAP because it’s so much better than the other options. This software is costly to maintain though, as new patterns have to be created for every new car that’s released. This expense runs through financing cash flow (development of intangible assets, specifically) and has been well over $150,000 per quarter as of late.
The average Xpel Ultimate film install is less than $1,000 (for a partial front), but it can go up to $2,500 for full front. Importantly, every installer I’ve spoken to prices each premium film the same. So if you want the full front of your new Z06 covered, the local installer will charge you the same for Xpel Ultimate or Suntek (or 3M’s Scotchgard Pro for that matter). There are lower priced films, but this seems to be a small part of the market. If you’re buying film to protect a new car, an extra couple hundred dollars is worth it to get the highest end film that won’t yellow and will protect your resale value the best. The film cost is only around 10% of the install price so the cheaper low end films don’t bring down the final price to the end user that much.
The #1 tailwind for Xpel is increased industry penetration. I didn’t know PPF existed until I came across Xpel a couple years ago and I’ve told a lot of people about this company that hadn’t heard of PPF either. PPF that is actually clear and protects your car is still a relatively new thing (Ultimate being released in 2011) so continuing to educate the market will be a major factor. A few years ago Xpel estimated PPF industry penetration at 2-4% of cars. Compare this to 60% penetration for window tinting. PPF will never be as big as window tinting, but I think it has a long way to go from 2-4%. It’s easy to think a $1,000 aftermarket addition to your car is only for car lovers or people driving Lamborghini Mercys, but the market is bigger than that. Xpel has started to have success on even low end cars. For $1,000 you can virtually guarantee the front end of your car is in perfect condition when you go to resell it five or ten years down the line.
Dealerships have also started installing film on cars—either on all cars they sell or as an option. Many of these are lower end films which unfortunately makes sense. The dealer markets film protection as an upgrade, then they use a cheap film and keep a higher margin for themselves. Xpel installers have had some success getting deals with higher end dealerships like Mercedes Benz and BMW though.
Finally, Xpel recently did a soft launch of their new window tint. They haven’t said much, other than they’re happy with the results so far and they think it can grow to be a significant part of the business. It’s way too early to make any predictions here, but the one thing I do like is that companies are always looking to consolidate suppliers. The fewer suppliers you deal with the simpler your job is. If Xpel can make a tint that competes with the best tints on the market (admittedly this is a big if), it makes sense that installers would consolidate their PPF and tint purchasing into one supplier. Suntek sells window tint films, but doesn’t seem to be regarded as one of the best.
You can probably tell I’ve done a lot of scuttlebutt on Xpel—talking to both installers and end users. From what I’ve seen, Xpel is preferred by end users over Suntek (and any other film for that matter). Not a ton of end users have experience with both, but I found people on high end car forums that own multiple cars and have tried both Xpel and Suntek films on them. The ones who have tried both definitely prefer Xpel, mostly saying that it’s clearer and thicker (it is thicker, but clarity is more of an opinion).
Interestingly, installers are more split and seem to slightly prefer Suntek over Xpel. When I say installers prefer Suntek, I’m referring to installers that use both Suntek and Xpel so they’re very familiar with both. Most installers have multiple films they use, but they all have one they think is best. I have a theory for why this is though. Xpel is a couple mils thicker than Suntek which makes it less flexible. Films have to be stretched when installed so less flexibility means it’s harder to work with and installation takes longer. I think installers prefer Suntek because it’s a quicker install and thus their hourly rate is higher (remember, installers charge the same for both films). Xpel makes their film a little thicker because it gives more protection from rock chips.
Of the installers I talked to that use Xpel and not Suntek, every single one recommended Xpel over the other brands they offer. Some small brands are well regarded, but 3M is not at all. I was shocked when several installers who use 3M openly bashed their product quality. On the other hand, I really haven’t heard anything bad about Suntek or Xpel’s products. Even the installers who prefer Suntek, it was almost always a statement like “Both Xpel and Suntek are great films, but I personally think Suntek is a bit more clear.” Overall, right now the industry is led by Xpel and Suntek and everyone else is far behind.
Ryan Pape used to be a technology consultant for Xpel before they hired him as CEO in February 2009. When he came on board the company was losing money hand over first, but he turned everything around. Pape makes around $250k a year compared to his ownership of 1.36 million shares worth $1.6 million. Not even a year ago his stock was worth over $4.7 million.
There are only three directors (not counting Pape) and each makes $36k and that’s it (no options). The three independent directors own over 1.4 million shares each. Combined, the four directors own 9.95 million shares that account for 38.6% of all outstanding shares. There are no options or warrants outstanding.
The #1 item under this section should be the 3M patent infringement lawsuit, but I chose to split that into its own blog post because there’s a lot to say. For now I want to talk about a couple other potential issues, first and foremost being increased competition.
As I said in the opening paragraph, Xpel may have made the first premium film, but they’ve had imitators coming at them ever since. There are a lot of films on the market today; I’ve counted around ten, but I’m sure there’s even smaller companies I haven’t come across yet. Xpel is the most well-known, followed by Suntek and 3M. Even though 3M’s Scotchgard Pro doesn’t get a lot of respect, they started the PPF industry so they’ve been around the longest and are still quite popular.
Increased competition usually shows up in gross margins. Newcomers try to steal business away from incumbents by undercutting them on price, forcing the incumbents to lower prices which compresses margins. Unfortunately, this is seen clear as day in Xpel’s financials. Their gross margin has fallen every year since 2011, from 41.6% in 2011 down to 29.7% in 2015. Q4 2015 looks even worse at 25.2%. While some of the recent compression is due to currency fluctuations which should normalized over time, the trend over four years is quite clear.
[Side note: I’ve always thought that niche markets with no public companies are probably less competitive than markets that have public companies in them. Xpel is the only public PPF company. I imagine this industry has become much more competitive because everyone sees how quickly they’ve grown and the margins they were producing and others wanted to get in on the action. If Xpel was private, it’d be much tougher for potential competitors to see how fast this market has expanded. In an alternate universe, maybe Ryan Pape takes the company private in 2011 and as a result has far fewer competitors beating his door down today.]
The last point I’ll make is that Xpel is (obviously) very dependent on new car sales. They have benefited from a massive tailwind here the past five years. After the financial collapse, there was a lot of pent-up demand for new cars as people delayed large purchases in 2008 and 2009. Some analysts believe this backlog is still working through the market and the auto boom has a few more years left in the tank. The popular opinion seems to be that the bottom is about to fall out of the auto cycle. You can see below that US new car sales is currently near its all-time highs.
Next week I’ll post part 2 covering my thoughts on 3M’s patent infringement lawsuit.
As of this writing, Wiedower Capital does not own shares in DAP.U. This is subject to change.