Sevcon is one of our holdings that hasn’t been too promotional about what it is doing and its industry. The company has a very small market cap (that will change very quickly). The company is positioned in what is going to be one of the fastest growing markets in the next 3-5 years. Recently the company did a presentation, I think this is one of the first conferences they had talked at in a long while, about the company. Key thoughts:
- The company has been slowly growing revenues, CAGR of 14% in the last 6 years. But the growth is picking up and the CAGR will be much higher going forward.
- The business model is based on subcontracting which will lead to rapid earnings growth as sales increases. Most screens and investors will pass on this company if they only look at the financials and skip looking at the business model.
- Their industry is expected to grow 6x in 7 yrs. This is a key reason SEV is going to be extremely well positioned to grow at much higher rate than 14%.
The key for this company is the sub-contracted business model with a well positioned company in a high growth industry. SEV is not the best company in the industry but a high tide raises all. And meaningful increases in sales will mean faster growth in earnings. Also, you have a large amount of the float owned by Gabelli. So increased investor demand will create an interesting dynamics. As management has stated, the next quarterly earnings will show meaningful revenue growth. That, combined w/ recent investor presentation will bring more eyeballs to this story.
Xpel reported its Q2 numbers on Aug 31st. Although the revenue didn’t meet expectations, the bloodbath in the market has been extremely surprising.
The company reported a solid 35% growth in rev and small net income growth. This headline news sounds bad for the company, when the CEO had said he was expecting to deliver at least 50% growth. So what happened?
The currency headwinds and slow down in ordering from international distributors led to a drop in the top and bottom line. If you listen to the conference call, the CEO mentions that the strength in USD caused distributors to delay their ordering. The distributors decided to use their inventory and hope to buy later, when hopefully exchange rates will work better for them. Many distributors order once a quarter, so a delay in their ordering can have a big impact on revenue. As long as the demand from end users and installers is there, the distributors will need to purchase from Xpel. The CEO mentioned that the growth in PPF is still the same as before. So the demand for PPF is there but Xpel didn’t notice that growth because the distributors decided to destock their inventory. This can last for a short while but they will have to come back and order from Xpel. So the lower revenue growth doesn’t mean business is slowing down. Infact, I believe that the company is growing at much more than the 35% that the accounting numbers show.
Now on the net income side, you have a 35% top line growth but little to no growth in bottom line. So what happened? First, Xpel owns the distributors in Canada and UK. So the currency changes meant that the margins compressed for the company. Now Xpel could have kept its margins by increasing the price it sold to installers. But if you increase prices while competition doesn’t, you could lose business. So Xpel eat the margin compression. Xpel mentioned that this compression in margins resulted in a $300k in bottom line. So net income would have grown 50% if this margin compression hadn’t occurred. Now, I don’t like to make one-time adjustments but the explanation is valid. Xpel already has started to past on price increases to installers. So this means margins will slowly get restored. I think we will have to wait a bit and see how competition reacts. You will see competition increasing prices, meaning they want the old margins, in the near future. I think once you see others passing on the costs, Xpel will be doing similar. So this $300K hit to bottom line will get fixed, but it will take a few quarters.
Finally, the CEO mentioned a few things about the future of the company. First, the window tint business is a very big market. Xpel is going to market their product directly to the PPF installers. The company has been doing testing with select installers and plans to slowly ramp up. This is going to be good boost revenue and additional source of growth. So far the company has been growing 50% just on the PPF market. Now you add the window tint business, so even if there is a slow down in the PPF market (which the CEO is not seeing), you got another much bigger market that they are entering. Secondly, the company is going to open another office in Europe in 2015. So they will have gone from 0 to 2 offices in Europe in about 12 months. Clearly they see huge growth opportunities here. Also, the CEO commented their training classes are still full. So the demand hasn’t slowed down.
The market reacted violently to the shares. The shares are down 33% since it reported Q2 #s. That is after showing a 35% growth in revenue. The market is reacting based on headline news, but the fundamentals of the business are still as good as we had expected. Xpel is my biggest holding and I haven’t sold any shares after this quarter’s numbers. If anything, I’m looking to buy more. I don’t mind the short-term pain for much better results in the long run.
Ackroo recently announced Q2 numbers. The market reacted violently, sending the shares down 20%. Although if you read the M&A and know the story with this company, then you would be happy with the results and excited for the second half of 2015.
- The company reported a 10% growth on Y-o-Y. Although this is not something to be proud off, but the subscription revenue grew by 14%. Now this might not look superb either but remember this is achieved with almost no sales team. Also we know this is achieved while the company was focused on integrating the 2 acquisitions. In light of these items, this is really good growth.
- The management team mentioned that they expect the 2 acquisitions to provide over 200K of revenue in Q3. This is a big deal as it gets the company closer to its 2015 goal. The company can be expected to do over 550K of revenue in Q3.
- The company is currently around low-600k for breakeven. So we can be close in Q3 and definitely be breakeven or profitable in Q4.
- The management still expects to do 2M in revenue in 2015. They have done around 650K in the first 2 quarters. That is a run-rate of 700K for the second half. That would be a profitable second half.
- Management is expecting to do another acquisition in 2015. Clearly management is feeling confident with having the correct operations to acquire and integrate acquisitions. This bodes well for 2016, when they will likely be able to get a line of credit to expand.
- Everlink, their reseller, is now up and running. Infact they got their first customer from this reseller in Q2. We should slowly start seeing more customers from this reseller. Everlink is a huge account for Ackroo, so management is doing the smart thing of slowly working with them to ensure they have a streamlined process to work with resellers.
It is amazing how quickly this company is moving. The new CEO joined the company only over a year ago. He took the helm when the company had no cash and a bloated cost structure. Since then, he has fixed the operations and took care of the cash issue. Now we are finally starting to see the growth in the revenue side. I think once he is able to get the operations to be profitable then we will finally start seeing the leverage in this business model. For all that this management team has done in the past year, the stock has not moved much. There is a big concern of delivering on the $600K of cash payment in December. With the warrants that will bring it about $2M in cash by January, I think management has enough cash for the big payment and to do another acquisition.
I typically do not read much about the CEOs of tech startups. A big reason is that I live in the Silicon Valley and most CEOs are building the company with an exit strategy. So there isn’t much to learn from them.
Although this piece on Brian Chesky and how he has learned to run AirBNB is a superb read. It is full of leadership lessons that will take years to get, if you are lucky to have a chance to experience it. As Munger says the best way to learn is to learn from other’s mistakes. This article will give you key leadership approaches that even a MBA program won’t be able to teach. A great read for anyone that is in leadership positions or interested in it.
Sanjay Bakshi is a professor and value investor in India. He has a huge online fan base and his online teachings are some of the best I’ve seen. A passionate value investor who has an amazing story about his struggle to build a investing business.
He recently did a presentation in which he talked about the importance of investing along-side great leaders. Intelligent Fanatics is a great read for anyone interested in making superb returns in investing. Also, it gives you a glimpse into the huge untapped potential in the Indian stock market.
I’ve been quite on the blog for a long time, so an update was called for. This year I’ve cut back on the number of holdings I have. I wanted to focus more on my best ideas instead of spread thin and hold multiple ideas that were a small position size. I haven’t found much new stuff to invest in but there has been one new idea that I have been buying up recently.
– BAC Warrants: I sold out of this position with good, not great, returns. I got 94% return over 3 years. Although there is still lot more upside to the shares and warrants, once the interest rates get increased, I think it won’t be a huge winner. Infact, if I looked at other holdings in the same period I could have made better returns by re-investing the capital from BAC to other holdings.
– ID Systems: I sold out of this position. The main rational was there are much better opportunities elsewhere. I think the company has finally turned around and the revenues will start increasing. But the upside is not that huge compared to other holdings.
– Ackroo (AKR): I built a large position in this company in 2015. The company is going through a transition and is poised for a huge upside. The new CEO has fixed the cost structure, created a new go-to strategy, executed well on the strategy, and has now started to build on M&A strategy. I think the company needs to show positive EBIDTA and cash flow, which will happen by year end. Once these two metrics work out then the company can execute on the M&A strategy and grow the business rapidly.
I currently only have 3 major holdings, there is 1 another position but it accounts for less than 1% of the capital. Xpel, Ackroo, and Sevcon will be the key drivers in how well I do in 2015 and going forward. I think all 3 are poised for huge numbers this year. The returns will be dependent on when the market realizes the value in these 3 companies. But I’m confident they will do exceptionally well in executing their strategy to grow business and increase value in 2015.
Lee Kuan Yew, the great leader of Singapore, recently passed away. He not only lead Singapore from the time it became independent from Malaysia, but he also was one of the sharpest minds about world politics. His views and advice was thought after not only in Asia but in the Western hemisphere. His practical approach to some of the most complicated issues helped put Singapore on the map and make it one of the top economies in the world.
I highly recommend people read any and all books about Lee Kuan Yew. I highly recommend From Third World to First, in which he discusses his many policy decisions.