The automotive sector is facing challenges as high interest rates make vehicles less affordable, while the adoption of electric vehicles is stalling due to high costs and limited infrastructure. This slowdown directly affects companies like Xpel (XPEL), which specialize in high-end protective films that depend on strong car sales. In today’s FA Alpha Daily, we look at how Xpel is navigating the current auto market pressures through international expansion and product diversification.
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The auto industry is in a rough spot. High interest rates are pushing up the cost of financing, making cars more expensive and putting pressure on consumer budgets.
The push for electric vehicles has hit a speed bump. EV prices remain high, and the infrastructure to support them isn’t where it needs to be.
Consumers want reliable, affordable options, but right now, EVs aren’t quite fitting the bill.
Protective film providers feel the impact of the auto sector’s fluctuations directly. When car sales slow, so does the demand for added features like protective films.
This is especially true for high-ticket options like full paint protection, which can cost several thousand dollars, making it a tough sell when consumer budgets are tight.
Despite these headwinds, Xpel (XPEL) is adapting.
The company specializes in protective films and coatings, offering products like automotive paint protection film, surface protection film, and window films for both vehicles and buildings.
These products are designed to shield surfaces from damage, enhancing durability and appearance.
Xpel has faced a challenging road in recent years, particularly after reaching an all-time high in 2021. Since then, the stock has dropped nearly 70%.
This decline is caused by reduced demand in the aftermarket, slower-than-expected electric vehicle (EV) sales, and a weaker consumer base in China.
To combat these pressures, Xpel has been pivoting toward international markets and expanding its product offerings.
China, in particular, represents a large opportunity for the company, which has been working to adapt its business model to the regional market.
This includes introducing a lower-cost product aimed at broadening the market reach in China, where previous premium positioning limited potential growth.
Given that China produces three times as many cars annually as the U.S., the opportunity for growth is clear.
Beyond China, Xpel is entering emerging markets like India, Southeast Asia, and the Middle East, where demand for automotive films could accelerate.
Another positive factor is the rising share of luxury vehicles in the global automotive market.
With higher attachment rates for protective films on luxury cars, the company stands to benefit from the growing preference for high-end cars, which are more costly to repair and more likely to be protected by films.
Xpel is also diversifying its product line. A recent addition is a windshield protection film, designed to reduce the need for costly windshield replacements by protecting against chips and cracks.
In the U.S. alone, around 14 million windshields are replaced each year, and this product could open a new revenue stream for the company while appealing to a broader consumer base.
Lastly, Xpel has also ventured into the architectural film market. Architectural films offer UV protection, heat rejection, and energy efficiency benefits, appealing to both residential and commercial buyers.
While this segment is still small for the company, contributing about 3% of total revenue, it has significant potential for growth.
With these growth drivers Xpel managed to achieve a 39% Uniform return on assets ”ROA” and 31% asset growth last year.
However, the market still has concerns about overall auto space, reflected by the firm’s 21x Uniform P/E.
Xpel’s strategic expansion in China and other international markets, its position within the luxury vehicle segment, and its new product launches in both automotive and architectural segments point to a solid growth path.
While short-term pressures may lead to volatility, the company’s diverse strategy and steady management support the case for potential long-term upside.
Best regards,
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
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