Summary
- Fox Factory has achieved double-digit year-on-year revenue growth, with a median growth rate of approximately 26%.
- The company's EBITDA and operating margins are clearly trending upward, with year-over-year growth of approximately 35%.
- With a debt-to-equity ratio of around 0.69, the company maintains low financial leverage.
- My intrinsic valuation - which averages DCF, comparable firms' P/Es, and EV/EBITDA - produced an estimate for the company's value at approximately $102, about $20 below its recent stock price.
- I rate the stock a hold, primarily based on the shares trading close to my estimated intrinsic value.
Fox Factory Holding Corp. ( FOXF ) has positioned itself to benefit from the growing demand for high-performance suspension products, particularly in the mountain bike and off-road vehicle markets, by establishing solid relationships with key players in the industry and producing high-quality products. The company has a strong pipeline of new products, including its Live Valve technology for mountain bikes and its electronic suspension systems for off-road vehicles. FOXF has a strong market position, a diverse product portfolio, a track record of innovation, and a favorable industry backdrop. The company's track record of success and growth potential make it an attractive long-term investment opportunity for investors with a high-risk tolerance. However, I currently rate the stock a hold.
What Does Fox Factory Do?
Fox Factory is a Braselton, Ga.-based company with a market cap of $5.2B that was established in 1974. FOXF designs and manufactures high-performance suspension products. Suspension products play an important role in helping absorb energy from the tires to stabilize a vehicle. FOXF's products are designed for a wide variety of vehicles, including mountain bikes, side-by-side vehicles, on-road and off-road vehicles, snowmobiles, and motorcycles. It produces a wide range of suspension products, including forks, shocks, and dropper seat posts for mountain bikes and shock absorbers for off-road vehicles, motorcycles, and snowmobiles. The company's products are known for their high performance, durability, and quality, and are used by professional and amateur riders worldwide.
Recent Corporate Performance
The company's success can be attributed to its strong brand recognition, diverse product portfolio, and history of innovation, all of which have enabled it to gain market share and expand its customer base. Fox suspensions are popular among off-road enthusiasts. They have participated in major off-road racing series like Baja 1000, Mint 400, and King of Hammers, and are now participating in Extreme E. Some of the major brands under Fox holdings are FOX, Marzocchi, Zone, RT Pro, JKS, Easton Cycling, BDS Suspension, and Ridetech.
In Q3 2022, the company experienced a significant increase in net sales, reaching $409 million , which is an 18% increase over the same period the previous year. The bike and powered vehicles segments also achieved notable sales growth, with 15.6% and 29.3% increases, respectively. The company's gross margin increased from 30.8% to 31.7% in Q3, and its net income for the quarter rose to $50.8 million, or $1.2 per diluted share. That's an increase from $43.8 million, or $1.04 per diluted share, in the same period the previous year. However, the firm currently has a negative levered free cash flow (LFCF) of $97.1 million, which is unfavorable for the company as it indicates the amount of money it has left after paying all its financial obligations.
Strengths
Fox Factory has a strong distribution network spanning the U.S. and internationally, with relationships with over 5,000 retail dealers and distributors and 150 original equipment manufacturer (OEM) partners, from which they derive all their revenue. The company has achieved consistent revenue growth, increasing from $403 million in 2016 to $1.53 billion in the trailing 12 months. That represents a compound annual growth rate ((CAGR)) of 25% driven by product demand, strategic acquisitions, and partnerships. They have also been announced as official suspension partner of Extreme E , an off-road racing series where Fox will be providing race-proven, off-road suspensions to 10 teams. This series will provide exposure to extreme off-road conditions and strengthen their brand recognition.
To support further growth, the company built a "state-of-the-art facility spanning approximately 336,000 square feet in Hall County, Ga., to diversify its manufacturing platform and provide additional long-term capacity for its Powered Vehicles Group." As of Dec. 31, 2022, the company had a backlog of approximately $223.5 million, and this new facility will help address this backlog. The company also has a quick ratio of 1.9, indicating good short-term liquidity.
Weaknesses
The balance sheet of Fox Factory weakened due to the high level of debt and low cash reserves. As of September 2022, the company had $153 million in cash and cash equivalents and $325 million in long-term debt. This high debt and low cash reserve hinder the company's financial flexibility to pursue growth opportunities and prepare for potential economic downturns.
Their products depend heavily on the off-road vehicle and mountain bike markets, which can be subject to seasonal fluctuations and changing consumer preferences. Their products are often priced higher than their competitors, which include Rough Country, Ready Lift, and TeraFlex. If demand for these products were to decline, the company's revenue and profitability could be negatively impacted.
In 2019, approximately 11% of Fox Factory's sales came from Ford (F), a powered vehicle OEM. Additionally, their 10 largest OEM partners accounted for 35% of sales in 2020 and 2021. This heavy reliance on a small number of customers poses a potential risk to the company's revenue and financial performance.
Looking Forward
The intrinsic valuations derived from various methods - including DCF (discounted cash flow), EV/EBITDA (enterprise value to EBITDA), and P/E (price to equity) multiples - indicate an average stock price of approximately $102, which is lower than the current price of $122. My assumptions for valuation methods are as follows:
The company has a slightly higher EV/EBITDA of 19x compared to the average multiple (based on the peer group) of 14x. This means FOXF is generating higher EBITDA than its peers, given the enterprise value.
The P/E value of the firm is 27x, slightly higher than the average multiple (based on the company's peer group) of 21x, which shows the stock is overvalued based solely on the P/E multiple. However, I believe some stocks deserve to sell at a premium multiple vs. their peers, as they have better brand recognition and premium products compared to their peers. I believe FOXF is one of those stocks.
With respect to DCF, the details are as follows:
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Cost of equity: 11.6%
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Cost of debt: 2.3%
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Tax rate: 20.8%
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WACC (weighted average cost of capital): 8.8%
Note that the values presented above are rounded off to their nearest integers.
The increase in the FCF of the firm has affected the intrinsic value of the share price and based on the DCF method to be $120, which is close to the stock price. Seeking Alpha rates FOXF at 207 out of 541 Top Consumer Discretionary stocks, has rated it a D- in valuations and an A+ in growth, and given an overall quant rating of 3.18 out of 5.
Conclusion
Fox Factory has reasonable earnings and attractive profit margins. I am a big fan of the Ford F-150 Raptor and Ford Bronco, which use Fox shocks for their off-road capabilities. And now, with their partnership with Extreme E, I will be watching this stock closely. However, I rate the stock a hold due to the threat of negative LFCF on its balance sheet and its high dependency on very few OEM partners.
For further details see:
Fox Factory: Bumpy Ride Ahead For This Specialized Suspension Company