Thread by @rubiconcapital_

– Valuation Musings

In my view, XPEL has “earned the right” to be valued using a DCF.

Its moat is well-documented, and evidenced by the numbers; hyper revenue growth rates, expanding operating margins, and very high and growing software-like returns on invested capital.

Henceforth, will likely always look expensive on trailing numbers. But if its moat is sustainable, for a “good” number of years to come, then its powerful combination of high growth with high ROIC means the value resides way, way out there [into the future].

The following tables summarize my DCF’s output for NPV/share under a [wide] range of potential future revenue/EBITDA growth scenarios, under various #’s of years prior to the point when a terminal value growth rate is then assumed (4.5% ‘r’ in all cases, 9% WACC).

Interestingly, this sensitivity analysis can be used to apply @mjmauboussin’s method of “expectations investing” which essentially means (paraphrasing) asking “what assumptions are ‘baked-in’ or ‘implied’ by today’s stock?”

With today at $25/share, we can eyeball/cherrypick four expectation scenarios that justify that price. Revenue grows:

1.40% for 2 years,
2.30% for ~<3 years,
3.20% for 4 years, or
4.10% for ~10 years,

…then grows @ 4.5% perpetuity (after each scenario).

In my view, given ’s long-run growth track record, business momentum through COVID, long-run product extension opps, and tangible business moat (see @LockStockBarrl ), a DCF does not require herculean assumptions to match today’s stock price and its implied expectations.