LEAT - Deep Sail Capital - Leatt Corp: Extremely Cheap

Summary

• The Leatt brand is synonymous with safety as they were the first to develop and market a neck brace.
• Because 50% of Motocross riders use a Leatt Brace, the majority of the industry is familiar with the brand.
• Cross sell explains why Leatt outperformed the industry in 2022.
• Leatt has a mid-single digit market share in helmets, but it basically doubled in 2022.

The following segment was excerpted from this fund letter .

Leatt Corp ( OTCQB:LEAT )

Leatt Corp. (pronounced: "Lee At") is a design and distribution company in the field of protective gear for motocross and mountain biking, including neck braces, helmets, gloves, chest protection, and apparel. I recently appeared on the podcast Chit Chat Money to discuss my long thesis for Leatt. Below is a summary of the fund's long thesis on Leatt:

High Quality Business Model: Leatt is a technology and design company. The technology and patents are all in house. They have created & patented two major industry safety technologies since their founding. The first is the Leatt Neck Brace, and the second is called 360 Turbine Technology, which is used in their helmets. The helmet technology is important, as the alternative helmet technology was developed and is licensed by MIPS from Sweden.

Leatt does all its own distribution. They outsource all their manufacturing to subcontractors in China, so they don't need any capex or expenses related to manufacturing. Because they own their own distribution, they have a lot of inventory in transit on their balance sheet. Their products are sold through regional distributors and specialty Motocross stores.

The Leatt brand is synonymous with safety as they were the first to develop and market a neck brace. They put a large emphasis on safety and design. Brand-wise, they now have an offering of a full "kit," including neck braces, chest protectors, helmets, boots, goggles, and apparel. Because 50% of Motocross riders use a Leatt Brace, the majority of the industry is familiar with the brand, making it much easier to cross sell helmets and apparel. They recently have been making a big push with marketing campaigns globally to increase brand awareness for their entire kit.

Gross margins are in the 40s, and ROIC is in the 30-40% range. Their margins have been consistent for the last 4-5 years, and I expect they can continue forward at around these margins for a long time.

Outstanding Management: Leatt is run by the founder, Dr. Chris Leatt (head of R&D, who develops all new products), and longtime CEO, Sean Macdonald. They have no need to raise capital; they have self-funded their new distribution center in the USA and built their inventory levels to support significant revenue growth over the next few years. Management has said they won't need to raise capital for anything and should start generating more cash as they scale their distribution channel to a reasonable level in 2022.

Substantial long term growth prospects: This huge market share in neck braces is a huge advantage when it comes to cross selling other gear. When someone is buying gear, they want it all to match, and they want it to look cool. So, if they have a specific-colored neck brace, they want to match the rest of their gear to it. That's part of the cross sell, which is why Leatt outperformed the industry in 2022. Their helmets really took off once they started to sell helmets with the 360 Turbine Technology, which launched in early 2022.

There are two types of Moto helmets: those that use MIPs technology and are used by Fox, Thor, Bell, and others, and those that use proprietary crash technology, such as Leatt and 6D. Companies with proprietary technology have better margins and set themselves in a different category than MIP-licensed helmets. Leatt has a mid-single digit market share in helmets, but it basically doubled in 2022 with the release of their new helmets with 360 Turbine technology, which are supposed to be safer than MIPS tech, per research released by Leatt.

Reasonable Valuation: We believe Leatt is extremely cheap as we believe it can grow revenues by 20-30% over the next few years. It currently trades at 5x EV/EBITDA on LTM and 8x PE. I do think that with a strong holiday season coming up, they could do over $3/share in EPS in 2022, with a current market price of about $19/share.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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