Fox Factory Races Ahead With New Suspension Products

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If you've ever seen a mountain biker hauling full-tilt over rocks and ruts, or an ATV driver barrel over terrain you wouldn't ride a mule on, you understand the importance of suspension systems.

Without proper suspension, these folks would go flipping head over hindquarters quicker than you can say "X Games."

For the best riders and drivers, not any kind of suspension will do. They spend a lot of money on high-end bikes and vehicles, and expect the best parts and systems in return.

This is the marketFox Factory Holding ( FOXF ) targets.

Fox Factory designs and makes high-performance suspension products for mountain bikes, snowmobiles, motorcycles and other on- and off-road vehicles. It aims for the high end of the market -- bikes and vehicles ridden by racing pros and other serious competitors.

"Most of Fox's customers on the bike side are real avid riders," said Lawrence Solow, an analyst at CJS Securities, which co-managed Fox Factory's Aug. 8 initial public offering on the Nasdaq.

These are not your weekend warriors out to sweat off a few extra calories for a couple of hours.

"About 5% of their customers are professionals, but the others also race or ride competitively," Solow said. "These are customers who always aspire to have the best product."

Fox gets most of its business from original equipment manufacturers. Its key customers include Trek and Cannondale in the mountain bike market, andFord ( F ) andPolaris ( PII ) in powered vehicles.

Big In The Best Bikes

About two-thirds of Fox's revenue come from its mountain bike division. In this segment, Fox offers front fork and rear suspension products. Solow estimates that the company has close to 70% market share in the "high-end," or top quartile, of the 3.5 million suspended mountain bikes sold globally.

"They are taking more share in high-end retail bikes," Solow said. "They dominate that market in terms of suspension."

Fox also has a dominant position in certain powered vehicle categories. The company holds an estimated 75% of the suspension market for side-by-side vehicles, which are ATVs that hold two passengers instead of one.

It also dominates the suspension market for a category known as on-road pickup trucks with off-road capabilities, Solow says. For that, Fox can thank its deal to supply suspension products for Ford's F-150 SVT Raptor, which was introduced in 2010.

Fox's products are sold to around 150 OEMs (original equipment manufacturers) and distributed to more than 2,300 retail dealers. OEM customers account for about 81% of overall revenue.

Most of Fox's competition comes from privately held companies. In mountain bikes, key rivals include Manitou Products, Marzocchi and RockShox. Its main competitors in powered vehicles include KYB, Sachs and Walker Evans Racing.

One of Fox's competitive advantages is its ability to keep coming up with new designs, analysts say. The company was founded in 1974 by Robert Fox, an engineer and motocross rider who designed an "AirShox" system in his garage as a way of improving on the performance of traditional coil springs.

In the years since, Fox Factory has earned a reputation for market-leading designs.

"It has been first to market with numerous innovative new product offerings. In addition, Fox has been able to leverage its expertise to address a broader range of end-markets and a variety of vehicles," Jon Andersen, analyst at William Blair, noted in a Sept. 3 report initiating coverage on Fox Factory.

He points to Fox Factory's success in the premium segment of the all-terrain vehicle category, which "preceded the widespread adoption of Fox suspension technology in the recreational side-by-side market."

Innovating The Ride

In 2012, Fox Factory launched more than 20 new products and got over 70% of its revenue from products introduced over the preceding three years.

Those products include the Podium RC3 for motocross bikes. The RC3 allows riders to make external adjustments so the shock can be tuned for different skill levels, terrain and racing type.

Another product, the ECS shock, boasts an external cooling system that can significantly lower temperatures, which lets powered vehicles operate at higher speeds for extended periods.

New product introductions have helped Fox Factory more than double its annual revenue over the past four years. The company is on track to log nearly $270 million in sales this year, up from $236 million in 2012.

Fox went public with an offering price of 15. It closed its first day of trading at 18.61, a 24% gain. Shares currently trade near 20.

On Sept. 19, the company reported second-quarter results. It posted sales of $70.3 million, up 16% from the prior year. Net income climbed 32% to $5.7 million, while gross margin increased 190 basis points to 29.0%.

In a statement, CEO Larry Enterline said Fox Factory "identified several areas" for future margin improvement, though he didn't name which areas.

Over the past several years, the company has traded margin growth for more manufacturing capacity in order to meet sales demand, analyst Solow says. This increased production has led to "rising inefficiencies," including excess staff, freight and other costs.

While Fox Factory works to improve its efficiency and margins, it also has "multiple pathways for growth," Andersen notes.

He cites growth in existing product categories and market share, expansion into new product categories and geographic markets, and opportunities to move into other price categories.

Fox is the sixth largest firm in IBD's Leisure-Products industry group, afterHarley Davidson ( HOG ), Polaris,Brunswick Corp. ( BC ),Tumi Holdings (TUMI) andArctic Cat (ACAT).



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: BC , F , FOXF , HOG , PII

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