XPEL INC (NASDAQ:XPEL) Emerges as a Prime Candidate for Peter Lynch's GARP Strategy

In the world of long-term investing, few strategies carry the weight of Peter Lynch's proven methodology. The former Fidelity Magellan Fund manager achieved remarkable success by focusing on companies with sustainable growth paths, reasonable valuations, and strong financial health. His approach, often described as Growth at a Reasonable Price (GARP), emphasizes fundamental analysis over market timing, seeking businesses that demonstrate consistent earnings growth without excessive debt or overvaluation. This strategy has recently identified XPEL INC (NASDAQ:XPEL) as a potential candidate worthy of closer inspection.

Financial Health and Stability

Peter Lynch placed significant emphasis on companies with strong balance sheets and minimal debt exposure, believing that financial stability provides the basis for long-term growth. XPEL demonstrates notable strength in this area, meeting and surpassing Lynch's strict requirements:

• Debt/Equity Ratio: 0.0005 (significantly below Lynch's preferred threshold of 0.25)
• Current Ratio: 4.42 (well above the minimum requirement of 1.0)
• Altman-Z Score: 13.73 (indicating very low bankruptcy risk)

These metrics reveal a company that manages its obligations carefully, maintaining ample liquidity to endure economic downturns while funding internal growth without high leverage. The virtually nonexistent debt burden means XPEL isn't constrained by interest payments or restrictive covenants, providing operational flexibility that Lynch valued highly.

Sustainable Growth Profile

Central to Lynch's philosophy was identifying companies growing at sustainable rates, not explosive growth that could falter, but consistent expansion that could build over years. XPEL's historical performance aligns well with this principle:

• 5-Year EPS Growth: 26.4% annually
• 5-Year Revenue Growth: 26.48% annually
• Expected Future EPS Growth: 29.4% annually

While Lynch typically preferred growth rates between 15-30% to avoid unsustainable expansion, XPEL's consistent performance near the upper end of this range suggests a business model able to maintain above-average growth. The company's transition from automotive paint protection films to wider surface protection solutions across multiple industries provides diversification that supports continued expansion.

Profitability and Efficiency

Lynch sought companies that not only grew but did so profitably, with effective use of shareholder capital. XPEL's profitability metrics stand out significantly within the automobile components industry:

• Return on Equity: 19.03% (exceeding Lynch's 15% threshold)
• Return on Invested Capital: 17.90%
• Profit Margin: 10.84%
• Operating Margin: 13.62%

These figures indicate that XPEL isn't just growing for growth's sake, it's generating substantial returns from its expansion efforts. The high ROE suggests management is effectively using shareholder capital, while the strong margins provide a buffer against competitive pressures or economic challenges.

Valuation Considerations

The Lynch strategy emphasizes reasonable valuation through the PEG ratio, which compares a company's P/E ratio to its growth rate. XPEL presents an interesting valuation picture:

• P/E Ratio: 22.35
• PEG Ratio (Past 5 Years): 0.85
• Forward P/E: 16.17

The sub-1.0 PEG ratio suggests the stock may be undervalued relative to its historical growth, a key Lynch criterion. While the standard P/E ratio appears slightly elevated compared to industry averages, the forward P/E and PEG ratios indicate the market may not be fully pricing XPEL's growth potential.

Fundamental Assessment Overview

According to ChartMill's detailed fundamental analysis, XPEL scores 7 out of 10 overall, with particularly strong ratings in profitability (9/10) and financial health (9/10). The analysis highlights XPEL's excellent returns on capital, strong margins, and solid balance sheet as key strengths. While valuation receives a more moderate score (4/10), the report notes that XPEL's high profitability may justify its current multiples, especially considering expected earnings growth of nearly 30% annually.

Investment Considerations

For investors following Lynch's principles, XPEL represents the type of "business you can understand" that the legendary manager favored. The company's focus on protective coatings and films serves practical needs across automotive, architectural, and industrial applications, precisely the kind of straightforward business model Lynch appreciated. The company's expansion into new applications and geographic markets provides multiple avenues for continued growth without entering overly complex or speculative areas.

While the recent slight decline in EPS growth warrants monitoring, the long-term path remains strongly positive. Lynch often noted that even the best companies encounter temporary setbacks, and what matters most is the sustainable long-term growth story.

Exploring Similar Opportunities

Investors interested in finding more companies that meet Peter Lynch's investment criteria can explore the complete screening results to identify other potential candidates that combine growth, value, and financial strength.

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Disclaimer: This analysis is based on fundamental data and historical performance. It is not intended as investment advice. Investors should conduct their own research and consider their individual financial circumstances before making investment decisions. Past performance does not guarantee future results.