Updates: GCI Liberty, XPEL, Jet2, Seaport, Judges Scientific, Watches of Switzerland, (GLIBK, XPEL, JET2, SEG, WOSG, JDG)
Latest analysis on GLIBA, XPEL, JET2, SEG, WOSG, JDG
Make sure you’ve read the latest Special Report on GCI Liberty (GLIBK) and the update on why Malone is doing a rights offering.
See the Table of Contents for a list of all published articles, grouped by stock.
Hidden Gems Investing will be raising prices at the end of this year, but any subscription made before then locks in today’s rate for life. Most of our reports require well over 100 hours of work and thousands of dollars in research expenses. A subscription gives you all of that for just $347/year, saving you enormous time and cost. Join the over 5,800 free subscribers and 280 paid subscribers who have upgraded in the 12 months since the newsletter was launched, or go here to learn about what you can expect as a paid subscriber:
There was a lot of (largely positive) news on many of the stocks this month. This update will be longer than usual, and I will follow up with separate pieces and deeper analysis. Here are the updates:
GCI Liberty (GLIBK)
The rights offering is now underway, and you can read my analysis on it here.
John Malone also made some comments about GCI at Liberty Media’s Investor Day on November 20th, which I think are worth reprinting in full:
“And the spin-off of a little company that I’m going to talk about in a minute, GCI out of Liberty Broadband because I was already over 50 of the voting control of Liberty Broadband, I end up in hard control of it. And it will be, let’s say, by next summer, the only company that I expect to still be on the Board of, a public company, where I’ll be Chairman, at least until it figures out what its strategy is.
I personally believe I can start another Liberty Media with appropriate strategy and capital structure using that as a core vehicle. It got spun off with extraordinarily good tax attributes. Why would you think that?
And I think a sustainable cash flow generation, relatively modest capital investment requirements to sustain the business. And I think it is appropriate to think of as a vehicle for growth and for recreating something like the original Liberty Media. The benefit, of course, is that the great staff at Liberty Media that has been assembled, the young folks, quite talented are available to support that enterprise on a contractual basis.
And I’ve asked some close friends of mine to be involved. Now I made the original investment, I believe, in the Alaska Communications business in 1989, I believe, Ron Duncan, who’s been consistently its CEO since, done a great job. It does a wonderful job for the state of Alaska. It’s not like most companies, it doesn’t face multiple competitors in every aspect of its business. It’s a duopoly really in the cellular business in the larger towns and it’s a virtual monopoly in terms of the terrestrial broadband business.
So it’s a little different than what you see under a lot of stress in terms of the average cable company right now or old cable company. So that differentiates it. But using my thesis that you can do well by accumulating undervalued assets, sheltering them, sheltering their taxes, appropriately managing their tax liabilities and their use of capital, I think, it represents kind of an interesting opportunity for me and for anybody else who chooses to come along. We are doing -- we’ve announced the rights offering where we’re going to raise $300 million of new equity. It’s not an over levered business. It’s only levered about 2.7x with pretty good debt.
So I’m setting it up basically to be able to do deals and grow. And I personally am backstopping the $300 million rights offering. So we’ll see what happens. It’s an interesting thing.”
Later on:
“Well, first of all, on my scheme for what do I do with GCI. When markets dump sectors they’re not very discriminatory, okay? They throw the baby out with the bathwater. So trust me in this huge world we’ve got there are a number of communications businesses that are going to generate a lot of free cash flow for a very long time that are selling very cheap okay? And so the goal is to find those, be selective, own enough of them that when you shrink them, you’re just driving up your own economics, okay?
Same model. And shelter their free cash flow because you have extraordinary tax attributes, use financial engineering where it’s appropriate. When we created the spin-off vehicle GCIL, we did it in the state of Nevada, which has much more flexible charter governance than Delaware. We set it up with the ability to do tracking stocks, for instance, to do preferred of anything I can dream up. I might point out the first Liberty Media when we first created it was because we didn’t think we were getting appropriate valuation on miscellaneous assets.
We threw them into an entity called Liberty Media. We did a simultaneous incorporation. Within a month or so of its creation, I issued a preferred stock, distributed to all Liberty Media shareholders that had a bigger face value than the market cap of the company because I wanted to shift tax basis from common to preferred. And then those people who wanted to recover their tax bases like me, could sell the preferred, recover the capital and go forward with an equity that was more levered, but without a risky type of leverage because the preferreds were very soft and very flexible.
And so it was a little financial engineering, but it was very important to effectively in one transaction, double the value of the common equity, which effectively happened. So financial engineering in some situations is important and the flexibility to do so is important. So that’s kind of the way I look at it. So I look at opportunities in a space that I’m familiar with.
If you can’t find them in the space you’re familiar with, you look at tangential synergies where your tax attributes, your financial attributes, your timing, you can be truly opportunistic. I mean what the hell did we know about satellite radio when Sirius became an opportunity, for instance.
So being opportunistic, making sure you’ve got flexibility and currency to be able to take advantage of opportunities when they present themselves. I think -- so timing is a very important thing. I think that’s the way I see it as an opportunity because I’ve got some pretty smart staff members over at LMC.”
XPEL
Special Report, Notes from the trade show
XPEL reported good Q3 results, which included several meaningful announcements. The stock has rallied strongly since, but I think may be just as undervalued today.
Revenues = $125.4mm, +11.1% y/y
US +11.1% / China +11.2% / Canada -10.0% / Europe +28.8% / Asia Pac +21%
PPF +4.9% / Window film +22.2% / Installation +16.9%
EBIT = $16.8mm, 13.5% margin, -8.9% y/y
Margins were quite disappointing at face value and once again included various one-offs like timing related issues and significant investments in sales & marketing (+29.7%) and G&A (+15.8%), which they expect to leverage in the future.
However, their announcement of a mid-high 20% EBIT margin by the end of 2028 (see below) overshadowed the margin in the quarter.
Q4 guidance is for revenues to be $123-125mm, or +14% to +16%. That includes the China distributor acquisition, which I estimate adds ~4% to revenues.
The real story though is that management made important announcements on (i) future growth, and (ii) the margin expansion opportunity.
Growth
As a reminder, XPEL’s stock since 2020 has gone from $15 to $100 and back to the $30s after the company went from delivering 25%+ growth for years to 6% in 2024. The Special Report published in March argued that investors have overreacted and are extrapolating 2024 growth to be the new normal when in fact XPEL still has a long runway of around 13% organic growth and that margins will rebound. XPEL still has four large organic growth opportunities, each of which could contribute 5ppts of revenue growth at the company level. These are growth by:
OEM & dealership channels
New products
International expansion
Pricing
XPEL’s Q3 results were significant because they directly support the thesis that the company still has a long runway of ~13% growth and addressed points 1-3. Aside from the growth in the quarter and guidance for Q4, which will bring 2025 growth to ~14% despite a turbulent year, management stated that:
XPEL experienced double-digit growth in the dealership channel and expects to continue expanding the OEM referral program. See my update from a trade show in September if you’re interested in why I think the OEM opportunity is large and accelerating.
The new color PPF products are “probably the best rollout we have ever done”. The +22.2% growth in the Window Film segment in the quarter also suggests that the windshield film rollout continues to progress well, given that it is booked in that segment and window film itself is increasingly a mature business.
The reception following the acquisition of their China distributor has been “incredibly encouraging”. My understanding is that the OEM and dealership businesses in China are multiples larger than the aftermarket, and that the distributor had been reluctant to pursue those channels for fear of being cut out. XPEL can now go after that business.
More generally, I think CEO Ryan Pape summed up the growth opportunities well on the call:
“There’s no better time in history to make these really final investments in these countries where we want to operate the most. This is a very tough environment for many people, for many of our competitors. You see a lot of folks pulling back where we’re investing. And I think that’s what you want for the long term. The investments in SG&A in these countries is very much front-end loaded. But these are the best markets in the world, and they’re ones that are impossible to develop in any meaningful way without our direct participation.”
Margin Expansion & Manufacturing
Perhaps even more eye-catching than the growth opportunities was the announcement that XPEL will invest heavily in manufacturing. This is expected to:
Require $75-$150mm over 2 years via capex, M&A, and/or JVs.
Increase gross margins by 10ppts to 52-54% and EBIT margins to mid-high 20% by the end of 2028.
If XPEL gets close to these targets it will result in a massive increase in profitability vs my expectations. For context, in the Special Report I had modelled a 2027 EBIT margin of 17.3%.
Assuming XPEL hits 25% implies a 45% increase in profits over what margins would have increased to without the investment. That equates to a ~$50mm increase in EBIT in 2028+ on a $75-$150mm investment for a 1.5 to 3 year payback. A 25% margin would also result in a ~$5 EPS.
I will provide a deeper analysis after attending XPEL’s Dealer Conference in January, and my experience is that the base rates of companies successfully achieving their target paybacks are low. I would prefer XPEL primarily goes down the M&A and JV route given the reduced execution risk and shorter timeline, and suspect that even if that costs $150mm instead of $75mm the company will have made up much of the difference by generating higher margins sooner.
Nevertheless, if management does go down the capex-only route this will have been the result of years of planning and recruitment, which I think reduces the execution risk.
I know this because I attended XPEL’s Investor Open House at its San Antonio headquarters, warehouses, and R&D facilities in 2023, and one of the speakers was Greg Booth. Greg was already XPEL’s Director of Manufacturing at the time and was previously Director of Film Technologies at Entrotech, XPEL’s key manufacturer. It appears that XPEL has been preparing to expand into manufacturing for three years.
My notes from the time were: