Description

I believe the ongoing inventory destocking in the bike industry (previously addressed by pathbska in his January write-up of Shimano) presents an attractive opportunity to short shares of Mips. While already down over 30% YTD, I believe there is at least a further 30% from here as helmets lag behind the rest of the industry and management is forced to reset the LT growth expectations it set at the cycle peak.

Company overview

Mips is a Stockholm-based helmet technology company that specializes in safety systems that helmet manufacturers implement into their products to improve effectiveness.. Mips reports in three segments – Sport, Moto, and Safety, but generates 95% of its revenue from the Sport segment of which the vast majority is bike helmets.

Even though the actual impact to injury prevention of Mips’s system is up for debate, the brand is undeniably strong. Most helmet manufacturers include the Mips name in their product listings. ASPs for helmets with Mips are $15-20 higher than those without. This is an attractive proposition when compared to the ~$5 per helmet that manufacturers pay Mips to use these systems.

There is no argument that Mips isn’t a quality company. It has grown revenue at a 16% CAGR since its 2017 IPO with EBITDA margins consistently above 40%, reaching as high as 55% during the 2021 peak. FCF conversion has averaged around 70% of EBITDA since 2017 and maintained returns on equity significantly above 20% almost every year.

Market. I want to quickly address the Mips’ market opportunity as it is relevant to understanding what is required for management’s presumed growth trajectory. Mips claims the Sport market is ~65mn units of which 50mn are bike helmets. Given the extra cost of implementing a Mips system, the addressable market is limited to those that cost more than $25, which is ~35mn helmets annually. If we assume all non-bike Sport helmets are potential Mips customers, then Mips’s addressable market in the Sport segment is $250mn ($5*(35+15)) of which it has a ~15% market share. The data varies by source, but on the higher end, this market is expected to grow at a 5% CAGR through 2030.

Mips has seen mixed success in entering the other end markets so far with Moto revenues only growing from SEK 17mn to SEK ~27mn since 2017 while Safety has grown from SEK 3mn in 2019 to SEK ~18mn this year. At ~5% of total revenues combined, there is a long way to go for these to become meaningful financial drivers. Nonetheless, they do both offer the potential to significantly increase the company’s overall addressable market. Mips claims the Moto category to be 85mn units split between on-road and off-road and claims the Safety market to be as large as 400mn units, though the vast majority of these are “type-1” helmets that are too simple and low-cost to economically implement a Mips system.

It is my view that Mips needs Moto and Safety to grow at much higher rates for its 2027 targets (addressed below) to make sense. Without these markets the 2027 targets would imply Mips reaches 63% market share by 2027 – growing at a 50% CAGR vs. 5% for the market! So, progress in Moto and Safety is a must.

It's also worth noting that while Mips is the market leader in this type of technology, it is not alone. Its primary competition is from US-based Wavecel. Currently the two companies are fighting over who makes a better system. There are a lot of online conversations among bike enthusiasts over which is better, and a quick Google search will provide you with reasonable arguments for either side. I have nothing to add, but this is unlikely to be a winner take all market.

Why now? During its 2022 CMD, Mips announced new long-term targets for 2027 that were a significant step up from its previous targets set for 2025.These targets were made at the peak of the cycle before numbers began falling this year.

While the margin target seems attainable, since it was already met temporarily in 2021, the revenue target is extremely aggressive. It implies a 50% CAGR over the next 4 years. With revenue down ~41% YTD and the ongoing weakness in the industry seemingly having no end in sight, I can’t see how the company gets there. The longer the current inventory correction plays out, the more impossible it becomes, and as management stated on the Q3 call, the helmet destocking is lagging behind the rest of the industry.

What makes this idea timely is that it seems to me that management has realized they will need to cut these targets. On the Q3 call, management’s response a question regarding the targets sounded to me like we will be seeing a cut possibly as soon as during the FY23 results:

“So, when we are summarizing the year, we will put all this into one basket and assess what's the potential new target and if any changes needs to be done. And then, of course, we will communicate them in due time.”

It’s been 5 quarters, won’t the industry rebound soon? The biggest pushback here is that the industry’s inventory issues are well-known and have already played out this year in both the financial results and stock prices. Most analysts are penciling in a return to growth for 2024, but I don’t see how anyone can realistically get conviction in that. Below is a quick run-through of the inventory days trends of several other bike industry participants. In most cases we are still 50-100% below normalized levels. Despite this the Street is forecasting growth for each in 2024, even though 2023 revenues are still ~20% above pre-COVID levels. Mips itself is 50% above normal inventory levels with consensus revenue growth of 43% next year.

Giant (Street sees 6% revenue growth in FY24; FY23 revenues is 14% above 2020):

Merida (11; 9%):

Thule (8%; 19%):

Shimano (1%; 25%):

Additionally, while only a crude proxy for demand, google trends for “bicycle helmets” do not instill much confidence in a rebound:

So, what is it worth? Admittedly, I don’t know the right multiple for a growth business with a murky runway like this, but 20x EV/sales seems too rich, particularly given the headwinds and current interest rate environment.

Currently, shares are trading on 108x this year’s earnings and 50x next year's (if you believe the Street). I think the stock could be cut in half and still look expensive. However, given the quality of the company, I wouldn’t fight with a 30x P/E multiple on FY24 earnings which would imply 40% downside.

Risks. The bike industry rebounds strongly, and management maintains their 2027 targets. The stock is currently only trading on ~12x these targets if you truly believe they can get there. This will likely require some kind of major breakthrough in adoption within the Moto and Safety segments.

Catalyst

Management cuts 2027 targets.

Industry inventory situation continues to drag on.