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Archive for September, 2015

SEV: Presentation and huge growth

September 19, 2015 Leave a comment

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.

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Categories: Updates

Xpel: Q2 and bloodbath

September 1, 2015 Leave a comment

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.

 

Categories: Updates