An Under-the-Radar Pandemic Play

Americans have always had a love affair with their cars. It’s a stereotype not far from the truth that Americans don’t mind living in a small house as long as we can have a huge shiny vehicle in the driveway. We invented the car, perfected its manufacturing process, and it wasn’t long ago that the world’s top three car makers were all American (the Japanese put a halt to that streak).

Of course, all that car love is meaningless if we don’t protect those resplendent machines and make them look as pretty as possible. This means that after-market car care is a booming business. And it’s slated to get even bigger in the years ahead.

The global car care products market is expected to grow from $12 billion in 2019 to nearly $21 billion by 2025, a compound annual growth rate of 9.6%. A sizeable chunk of that business will come from drivers who are putting off new purchases amid economic uncertainties caused by the pandemic. In the second quarter, new car sales dropped more than 30% — the steepest plunge since the Great Recession and auto bankruptcies 11 years ago.

A key sub-segment of this growth is the “restyling” trend. For car enthusiasts, restyling products – think paint protection, tinted glass, chrome — are among the most indispensable tools for maintaining and customizing a vehicle. This subsector accounted for $1.8 billion in sales in 2019. And according to the Specialty Equipment Market Association (July 2020), the restyle product market “is poised to expand worldwide in the coming decade.”

One company is uniquely poised to capture a huge share of this growth… and it has two additional product lines that combine to make this a timely play. XPEL, Inc. (XPEL) was founded in 1999 in San Antonio, Texas, and is the country’s leading manufacturer, distributor, and installer of after-market car products, including an award-winning paint protection product that can be professionally installed or done at home using a kit. The company sells around the world through its website, big box retailers, and franchised distribution and installation centers.

Additional product lines include headlight protection, window tinting film, interior fabric/leather protection, door edge guard, cleaning cloths, and several “do it yourself” car protection and detailing kits.

And get this: there are two new applications of its patented protection film — commercial window tinting for buildings, which leverages the “green building” trend, and tinted face mask shields (think COVID-19). Together, XPEL’s wide range of products brought in $140 million in revenues last year on 60.4% EPS growth, including a 32.2% surge last quarter.

Investor’s Business Daily gives shares of XPEL a rare “triple-A” rating (strong sector, sales, ROE, margins, and share accumulation). The company’s outstanding return on equity is especially worth noting: it’s at 42.1%, which, when coupled with the company’s low long-term and short-term debt-to-equity ratios, suggests that the company is both conservatively managed and nicely set up for a long stretch of sustainable growth.

Last week, after XPEL reported earnings a full dime above the $0.05/share forecast – another benefit of conservative management – and raised its forecasts, the stock surged 32% higher in just three sessions. As 5-star analyst Jeff Van Sinderen of investment bank B. Riley FBR writes of XPEL, “Acceleration of overall revenue began in May and established a monthly record in June that was more than double April revenue.” And this: “XPEL achieved record cash flow during 2Q, driven in part by inventory reduction.” (Translation: they can’t keep product on the shelf due to demand!). Van Sinderen also notes that while XPEL sells broadly in China, none of its supply chain is located there, reducing the risk of disruption.

Following the post-earnings move last month to new all-time highs, shares of XPEL have pulled back about 21%. This gives us a lower risk entry.

Action to Take: Consider buying XPEL below $27, with a view to selling around $40 or at six months, whichever comes first.