Summary
- Fox Factory is a long-term growth play in suspension and related products, used in a range of applications.
- The company has seen a solid share price performance in recent years amidst pandemic-induced trends and solid M&A track record.
- I like the long-term pace of the business and stock, but I am awaiting a better entry point.
Shares of Fox Factory ( FOXF ) have seen quite some volatility in recent years, warranting an update as the last take on the business dates back to November 2020. At the time, I believed that shares had seen a roller coaster ride as shares initially halved in response to the outbreak of the pandemic, to triple ever since.
With shares trading near the $100 mark at the time, I was a bit cautious amidst a high multiple in combination with a cyclical nature of the business as this cautious stance has been a reasonable approach.
Suspension
Fox Factory is a designer and manufacturer of high performance suspension products, typically used in mountain bikes, off-road vehicles, snowmobiles and related products. Specialized producers like Polaris Industries ( PII ) use these products, as more generic manufacturers like Ford ( F ) do so as well. The company over time has been branching out to other categories as well including trucks, SUVs, RVs and even defense applications.
Just a quarter of a billion business in 2013, the year in which the company went public, the company has come quite a long way, with revenues having tripled to three quarters of a billion in 2019. After posting modest profitability in 2013, operating earnings had risen to $113 million in 2019, for mid-double digit operating margins. This translated into net earnings of $2.38 per share, or about 30 times earnings with shares trading at $70 at the time.
The company announced a substantial $328 million deal for SCA in February 2020, expecting sales to increase to roughly $900 million in 2020 with earnings seen around $3 per share. The SCA deal could push sales to the billion mark and reduce earnings multiple to the lower to mid-twenties, but this was based on forward looking earnings while some debt was incurred as well.
Shares immediately fell to $35 in response to the outbreak of the pandemic, as shares quickly rebounded, and even hit the $100 mark in August 2020. Increased demand for outdoor sports made that year-over-year growth quickly returned in an impressive fashion, even as the full year outperformance trailed initial expectations following a very soft second quarter.
Trading at $85 at the time, I was a bit concerned as earnings power trended around $3 per share, while leverage came under control following an opportunistic equity raise over the summer as I feared the above average cyclicality of the business.
Running Away - Settling Back
Since voicing a somewhat cautious tone at $85 in November 2020, shares essentially doubled in the year which followed with shares trading at a high of $180 later in 2021. What followed was a big pullback to a low of $75 over the past year as shares have recovered a bit, now exchanging hands at $112 per share, marking a 50% recovery from last year´s lows.
In February 2022, Fox Factory posted spectacular results for the year 2021. Revenues rose from $890 million in 2020 to $1.30 billion, as operating profits of $197 million translated into margins of 15%, up more than two points on the year before. GAAP earnings of $164 million worked down to $3.87 per share, all while net debt of around $200 million was very manageable, trailing EBITDA of $264 million.
The company guided for continued growth in 2022, with sales seen up around 10% to a midpoint of $1.45 billion, with the midpoint of the adjusted earnings guidance seen at $5.05 per share. Needless to say, these translate into very high valuations, with shares at the peak trading at 35 times forward earnings.
Despite the sluggish share price performance of Fox, on the back of the high multiple from the get go, the company even hiked the 2022 guidance alongside the release of the first quarter results. The company kept hiking notably the sales guidance (and the earnings guidance into a lesser extent) throughout the year amidst inflationary impacts.
By February of this year, the company posted 2022 sales of $1.60 billion, a three hundred million increase from the year before, twice the anticipated sales growth seen at the outset of the year. Operating earnings rose similarly to $246 million, with net earnings of $205 million working down to $4.84 per share. Adjusted earnings came in at $5.49 per share, ahead of the original outlook as well as the reconciliation look quite reasonable, with net debt largely eliminated at just $55 million.
With EBITDA having improved to $322 million, leverage is really no issue at all, leaving plenty of debt capacity for the firm. The company guides for some kind of stabilization in 2023, with sales seen up modestly to $1.67-$1.70 billion, and earnings seen around a midpoint of $5.30 per share on an adjusted basis. This suggests that sales are up modestly yet anticipated margin pressure is hurting earnings per share, creating at tougher set-up here.
The 42 million shares outstanding now trade at $112, for a $4.7 billion equity valuation and an enterprise valuation which is in line with this. This is equivalent to about 3 times sales and 20-21 times adjusted (forward) earnings. This comes after shares shed some $10 in response to the release of the quarterly numbers, but moreover the 2023 guidance, as the small decline in earnings per share seen in 2023 arguably came unexpected to investors.
Another Deal
Just ahead of the fourth quarter earnings release, the company announced its next bolt-on deal in February. Fox Factory has reached a $131 million deal to acquire Custom Wheel House, a designer, marketer and producer of high performance wheel and related accessories.
With a purchase price equal to about 3% of the own enterprise valuation, this is a bolt-on deal as no revenue contribution has been announced, but likely it should add around 3% of total sales as well (assuming a similar sales multiple has been paid at which Fox trades itself). Likely we see some added color on this alongside the release of the first quarter results, as few details have been announced, other than that accretion to 2023 earnings is anticipated here.
Concluding Remarks
Truth is that a current multiple still feels a bit rich at 20-21 times earnings with no growth seen this year. Appeal has to come from perhaps a lower share price as this was a $90 stock by Christmas, as those levels translate into a much more reasonable 17-18 times earnings multiple.
Given the softness in the guidance, I would not rule out a further drift lower in the shares. Shares would need to trade sub $100 before I would potentially see appeal in Fox, which inherently appears to be a strong and solid business with a decent acquisition track record.
For further details see:
Fox Factory: Bouncy Trading