VALUE: After Hours (S07 E21): Scuttlebutt Advantage: How to Unearth Small-Cap Moats

During their recent episode, Taylor, Carlisle, and Chris Waller discussed Scuttlebutt Advantage: How to Unearth Small-Cap Moats. Here’s an excerpt from the episode:

So, with XPEL, for example, one of the things I did is I spoke to a lot of the installers. That’s where I discovered that the reason they are going with XPEL is not necessarily just because the film is the best or the software is the best. It’s actually that they just get more business because of the brand of the company. That’s something that would be quite difficult to figure out. If you were just reading the annual report, you’d probably look at this as a supplier of a product rather than more of a franchise. So, I always find it helpful talking to people in an industry.

I think going to trade shows and industry events is really helpful. I just came back from this thing called the Eastern Energy Expo. It doesn’t sound like the most exciting thing, but one of the companies that I’d invest in was TerraVest. They make storage tanks of different types. You can go to this expo and there’s about a hundred booths there of different people in this industry and you can just talk to all of them. So, I think it’s really helpful to just understand what’s really happening in an industry and why people go with one company or another.

Tobias: So, just before we move on from XPEL, talk us through the valuation proposition. What you expect there?

Chris: Yeah. So, I think at face value, this looks like a reasonably expensive stock. Certainly, for someone like me who’s used to cheap value things. So, I think earnings per share is about $1.70 and the stocks in $35 to $40 depending on which day you’re looking at it. So, it’s trading on 20 to 25 times earnings.

Just bear in mind. Last year, like I said, they invested in a lot of cost because they anticipated their revenue growth to continue at that 20% plus mark. And it didn’t. So, they’re really running a bloated cost base right now. They’ve talked about reducing some of that and talked about growing into some of that.

So, I think if you were to look on a normal margin basis, it’s probably trading on a high teens or 20 times multiple. This is a company that can still grow in my view, 15% per annum organically for quite a runway. And then, they’ve got a very strong balance sheet right now actually with net cash. So, I think they’re going to start deploying that either in acquisitions, where they’ve been quite successful in the past or they’ve just started a buyback authorization. So, I still think if you look on a three plus year basis, you can still generate a very nice return even if the multiple doesn’t go up from here.

Tobias: Let me just give a shoutout to the folks who are at home. First in the house. Toronto. Bixby, Oklahoma. Gothenburg, Sweden. Lausanne, Switzerland. Filthydelphia. Cromwell, New Zealand. Early stuff for you. Valparaiso. What’s up Mac? Dubai. Las Vegas. Tallahassee. Petah Tikva. Breckenridge. Bremerton. Tampa. Jupiter. Portsmouth. Brandon, Mississippi. Salzburg, Austria. Ballynamullan, Ireland. Milton Keynes. Prague. Dead Cat Gully, New South Wales. Me too, brother. Cincinnati. Jamaica. [Jake laughs] Rochester. Thanks, folks. Good to have you here. Let’s talk a little bit about TerraVest.

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VALUE: After Hours (S07 E21): Scuttlebutt Advantage: How to Unearth Small-Cap Moats

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