XPEL INC.: SEARCHING AND VALUING A GROWTH STOCK
CASE STUDY SOLUTION
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SYNOPSIS
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Catherine Liu is a retail investor who is interested in investing in XPEL Inc. (XPEL), a market leader in the
paint protection film (PPF) industry. Liu feels that the company’s stock is undervalued and wants to conduct
a valuation of XPEL. She started by reviewing the company’s annual report for 2023 and has gathered
relevant market information for her analysis. On March 14, 2024, XPEL’s stock was trading at US$48.562
per share, which Liu believed was undervalued. However, she would have to consider all financial and
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market information she had gathered before reaching a final investment decision.
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OBJECTIVES
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• Consider a company’s business model and identify its various business and financial risks.
• Learn how to apply the net asset valuation (NAV) and the earnings power value (EPV) approaches to
valuate a company and explain its competitive advantage and possible sustainability.
• Understand how the value, growth, momentum (VGM) multiplier can help assess a company’s valuation.
The Case Solution Starts From page 7
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ASSIGNMENT QUESTIONS
1.
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What is the difference between a company’s business risk and its financial risk?
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2. Estimate XPEL’s WACC and first-pass ROIC.
3. Estimate XPEL’s NAV, first-pass EPV, and second-pass ROIC.
4. Does XPEL have a competitive advantage? If so, is its competitive advantage sustainable?
5. Discuss the risk of investing in XPEL’s stock.
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So
The Case Solution Starts From page 7
,ANALYSIS
1. What is the difference between a company’s business risk and its financial risk?
Despite experiencing cyclical fluctuations, the PPF industry generally operates with a medium business risk
profile. The industry’s operating margin is 15.38 per cent over five years, 12.99 per cent over seven years,
and 11.34 per cent over 10 years (see Exhibit TN-1). While demand is tied to the economy’s overall health
and new car sales, the industry benefits from a high-end customer base and an extended product life span,
both of which provide stability. PPF caters to customers who are willing to invest in protecting their
vehicles, which tend to be higher-end cars. This provides some insulation from economic downturns that
might heavily impact budget-conscious consumers.
Chinese PPF private manufacturers are offering competitive pricing for low-end products, which is further
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The Case Solution Starts From page 7
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5. Discuss the risk of investing in XPEL’s stock.
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Management Impairment
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As discussed earlier in Assignment Question 1, XPEL’s current leader is a strong operator and capital
allocator. In 2024, Pape was only 42 years old, so it is far too early to discuss a leadership succession plan.
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However, if Pape were to be replaced by a poor leader, it could negatively impact free cash flows and EPV;
and in turn, the company’s franchise value.
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Accounting Irregularities
XPEL has a fairly conservative approach to revenue recognition. The company has never restated its
The Case Solution Starts From page 7
, EXHIBIT -2: FIRST-PASS RETURN ON INVESTED CAPITAL (BOOK VALUES)
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Return:
Earnings before Interest and Tax (Free of One-Time Adjustments) 3 3 3 2 12 17 23 40 54 67
Tax 1 1 1 1 3 4 5 9 12 15
After Tax 2 2 3 2 9 13 18 31 42 52
Add: Amortization for Goodwill (Merger Related)
Total Return 2 2 3 2 9 13 18 31 42 52
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Invested Capital:
Method #1
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Current Asset 10 14 15 20 21 36 63 79 107 146
Less: Excess Cash and Marketable Securities 1 3 2 3 4 12 29 10 8 12
Less: Current Liabilities 5 9 10 14 8 12 21 36 27 36
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Add: Short-Term Debt (Including Current Portion) 0 1 1 1 1 0 3 0 0 0
Operating Fixed Assets
Property, Plant, and Equipment
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Capitalized Operating Leases
Goodwill
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So
The Case Solution Starts From page 7
, EXHIBIT -5: VALUE, GROWTH, MOMENTUM MULTIPLIER, INTRINSIC VALUE,
AND ENTRY PRICE
Intrinsic Value and Entry Price Calculations
Net Asset Value $6.16
Earnings Power Value (EPV) $26.51
Net Asset Value Greater than Earnings Power Value
First-Pass Return on Invested Capital 32.12%
Second-Pass Return on Invested Capital 24.94%
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Sa
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tio
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The Case Solution Starts From page 7
CASE STUDY SOLUTION
e
pl
m
SYNOPSIS
Sa
Catherine Liu is a retail investor who is interested in investing in XPEL Inc. (XPEL), a market leader in the
paint protection film (PPF) industry. Liu feels that the company’s stock is undervalued and wants to conduct
a valuation of XPEL. She started by reviewing the company’s annual report for 2023 and has gathered
relevant market information for her analysis. On March 14, 2024, XPEL’s stock was trading at US$48.562
per share, which Liu believed was undervalued. However, she would have to consider all financial and
n
market information she had gathered before reaching a final investment decision.
tio
lu
OBJECTIVES
So
• Consider a company’s business model and identify its various business and financial risks.
• Learn how to apply the net asset valuation (NAV) and the earnings power value (EPV) approaches to
valuate a company and explain its competitive advantage and possible sustainability.
• Understand how the value, growth, momentum (VGM) multiplier can help assess a company’s valuation.
The Case Solution Starts From page 7
, e
pl
ASSIGNMENT QUESTIONS
1.
m
What is the difference between a company’s business risk and its financial risk?
Sa
2. Estimate XPEL’s WACC and first-pass ROIC.
3. Estimate XPEL’s NAV, first-pass EPV, and second-pass ROIC.
4. Does XPEL have a competitive advantage? If so, is its competitive advantage sustainable?
5. Discuss the risk of investing in XPEL’s stock.
n
tio
lu
So
The Case Solution Starts From page 7
,ANALYSIS
1. What is the difference between a company’s business risk and its financial risk?
Despite experiencing cyclical fluctuations, the PPF industry generally operates with a medium business risk
profile. The industry’s operating margin is 15.38 per cent over five years, 12.99 per cent over seven years,
and 11.34 per cent over 10 years (see Exhibit TN-1). While demand is tied to the economy’s overall health
and new car sales, the industry benefits from a high-end customer base and an extended product life span,
both of which provide stability. PPF caters to customers who are willing to invest in protecting their
vehicles, which tend to be higher-end cars. This provides some insulation from economic downturns that
might heavily impact budget-conscious consumers.
Chinese PPF private manufacturers are offering competitive pricing for low-end products, which is further
e
pl
m
Sa
n
tio
lu
So
The Case Solution Starts From page 7
, e
pl
m
Sa
5. Discuss the risk of investing in XPEL’s stock.
n
Management Impairment
tio
As discussed earlier in Assignment Question 1, XPEL’s current leader is a strong operator and capital
allocator. In 2024, Pape was only 42 years old, so it is far too early to discuss a leadership succession plan.
lu
However, if Pape were to be replaced by a poor leader, it could negatively impact free cash flows and EPV;
and in turn, the company’s franchise value.
So
Accounting Irregularities
XPEL has a fairly conservative approach to revenue recognition. The company has never restated its
The Case Solution Starts From page 7
, EXHIBIT -2: FIRST-PASS RETURN ON INVESTED CAPITAL (BOOK VALUES)
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Return:
Earnings before Interest and Tax (Free of One-Time Adjustments) 3 3 3 2 12 17 23 40 54 67
Tax 1 1 1 1 3 4 5 9 12 15
After Tax 2 2 3 2 9 13 18 31 42 52
Add: Amortization for Goodwill (Merger Related)
Total Return 2 2 3 2 9 13 18 31 42 52
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Invested Capital:
Method #1
pl
Current Asset 10 14 15 20 21 36 63 79 107 146
Less: Excess Cash and Marketable Securities 1 3 2 3 4 12 29 10 8 12
Less: Current Liabilities 5 9 10 14 8 12 21 36 27 36
m
Add: Short-Term Debt (Including Current Portion) 0 1 1 1 1 0 3 0 0 0
Operating Fixed Assets
Property, Plant, and Equipment
Sa
Capitalized Operating Leases
Goodwill
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tio
lu
So
The Case Solution Starts From page 7
, EXHIBIT -5: VALUE, GROWTH, MOMENTUM MULTIPLIER, INTRINSIC VALUE,
AND ENTRY PRICE
Intrinsic Value and Entry Price Calculations
Net Asset Value $6.16
Earnings Power Value (EPV) $26.51
Net Asset Value Greater than Earnings Power Value
First-Pass Return on Invested Capital 32.12%
Second-Pass Return on Invested Capital 24.94%
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Sa
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So
The Case Solution Starts From page 7
