Description

I am recommending a short trade in Fox Factory (FOXF).  The name has been written up twice in the past on VIC as a short, so it’s worth having a quick look at those pieces.  FOXF isn’t new to most short seller’s radar screens and historically everyone has been burned... first by their ability to add more SKUs than most figured in the powered vehicles segment, then by bolting on some large aftermarket premium truck upfitting businesses which juiced numbers, and finally having the picture perfect product lineup to take advantage of the WFH environment COVID produced.  

To go over their business in a nutshell:

• Specialty Sports

• 45% of 2021 revs

• Suspension systems for high end mountain bikes, $2000+ ASPs, but the real sweet spot is the $5000-6000 range

• Typically growth has been M-HSD, but will be about 40% in 2021 as customers replenish inventory

• Largest customers are all the big name OEMs (Giant, Specialized, etc)

• Powered Vehicles 

• 55% of 2021 revs

• Historically this was suspension systems for high end ATVs and dirt bikes but they have aggressively moved into the high end pick up truck market with SKUs from Ford, Toyota, etc and by acquiring their way into the aftermarket up fitting business via SCA and Tuscany (check out the websites, these are $120k+ vehicles) 

• This segment has been the stock’s rocket fuel since 2017, growing 50%+, but as their run out of SKUs to penetrate it will be more of a 10-20% grower going forward 

So, why short now?  The thesis boils down to:

• Their legacy bike business is actually going to be a bigger driver of growth in 2021 than their typically higher growth powered vehicle segment, the demand levels that were seen during COVID are completely unsustainable (anyone who tried to buy a bike from April of 2020 onwards can attest to this) and I believe there will be a large hangover before this segment reverts to it’s normal M-HSD growth rates a few years out.  Their largest customer in the segment, Giant, has already guided to a decel in 2H2021.  

• The whole recreational vehicle ecosystem has backlogs that allow them to point to a 2H2022-1H2023 restocking phenomena that will give them a “soft landing” to absorb any demand air pocket that may occur post-COVID.  This is the bull case.  Through dealer checks we have confirmed that the OEMs now understand that consumers have just been placing orders with multiple dealers and cancelling outstanding orders as soon as their product arrives.  PII seems to be worried enough about this to have taken the pre-ordering process out of the dealer’s hands and to the corporate level.  If you check back to our RV short write ups circa 2017 this sounds eerily familiar.

• FOXF sticks out in a big way relative to it’s customers in terms of both valuation and stock behavior.  It trades at a whopping 38x 2022 EPS while PII/F/Giant/etc trade at 10-15x and while FOXF is still hovering around all time highs everything else has rolled over as the stocks discount the peak nature of the current environment. 

• From a more macro perspective, almost nobody was traveling last year and the share of a family’s budget that this normally soaks up is about 5-10%, or $4000-6000 per trip for a family of four.  Clearly this was a boon to other high ticket purchases such as autos, RVs, ATVs, Pelotons, etc that should revert as the travel itch returns.

In terms of fair value, FOXF should earn about $4.00 in 2021 which they may actually be able to duplicate in 2022 as inventory is replenished.  However, in 2023 I think that looks more like $2.00 as inventory levels become normalized and retail demand settles out lower than 2019 levels for a period of 1-3 years.  FOXF is undoubtedly a “scarce brand” and has been a secular grower within the powersports space so I can see it commanding a premium multiple, but 20x peak and 30x trough seems more than generous, so $60-80 per share, in the face of decelerating and ultimately negative growth beginning 2H 2021.  The whole group has been selling off on beats this past quarter and I expect FOXF to be no different when they report a strong Q2 in August.

Catalyst

-Q2 earnings

-retail sales updates from their customers