With it being a fairly slow news day, we’re going to profile a
name that has quietly trading to new all-time highs: Fox Factory Holding corp. (FOXF 72.64, -2.52, -3.36%). FOXF is a supplier of performance shock absorbers, racing suspensions,
and related parts, which are used in bicycles, side-by-side vehicles, on-road and off-road vehicles and
trucks, ATV's, snowmobiles and motorcycles. Its brand is associated with high-performance and
technologically advanced products as its products provide users with improved
control and a smoother ride while riding over rough terrain. Its products are
generally sold at premium prices.
Fox has a
strategic focus on the performance and racing segments in its markets. Pro athletes use Fox products in
elite competitive events, such as the Union Cycliste Mountain Bike World Cup
and the X Games. This exposure
influences the purchasing habits of enthusiasts and other consumers seeking
high-performance shocks. Of note, the company makes sure that its FOX logo is prominently displayed on
bikes and powered vehicles sold by OEM customers.
The stock gapped higher in late October on a strong Q3 report and
it has not looked back. Non-GAAP EPS jumped to $0.72 from $0.46 last year while
revenue rose 38.0% to $175.8 mln. This reflected a 56.6% increase in Powered
Vehicle Group sales and a 21.1% increase in its Specialty Sports Group,
formerly referred to as the Bike Group. The increase in sales was primarily due
to the continued success of the company's product line up, particularly in the
OEM channel.
So, what has been powering its Powered Vehicles segment? Revenue
growth was driven by high growth in side-by-side vehicles, aftermarket truck
categories, and its off-road capable, on-road suspension products for OEMs. On
the call, management said that industry dynamics continue to favor FOXF's
premium product categories. In September, FOXF launched its new aftermarket FOX
RACING three-inch Internal Bypass suspension for the Jeep Wrangler JL at the
Pomona Off-Road Expo. Initial reactions were very positive and FOXF is excited
to bring this kit to market.
With 2019 just around the corner, FOXF sounds pretty excited about
its model year 2019 product lineup. It continues to be well received by
customers as demonstrated by strength in Q3 by both its OEM and aftermarket
sales channels. Also, FOXF has been expanding into new and existing end markets
building upon its powered vehicle and core bike categories.
In sum, FOXF has been making a strong move of late. The stock has
run from $35 in early May to around $76 now. A series of strong earnings
results, particularly in Q2 and Q3, has been powering the stock higher. What is
impressive to us is that FOXF has been able to do well at the premium side of
the market. That tells us that consumers are specifically requesting Fox's
products. This has led to nice margins as adjusted EBITDA margin in Q3 improved
to 22.4%, which is quite robust, from 21.2% last year.
Fox says its powered vehicle segment remains an exciting growth
area. Aftermarket sales have also been quite brisk. Fox has been boosting its
US manufacturing capacity to keep up with demand. With that said, the stock
looks overextended in the near term on the earnings gap higher, but is worth
keeping on the radar on pullbacks.