Fox Factory +70.58% Rally
"Know what you own, and know why you own it." -Peter Lynch
The portfolio is UP +17.50% YTD.
Our benchmark index, the S&P 500 is down -1.14% YTD.
Fox Factory Continues to Rally
Fox Factory is one of the companies I love, mainly because I know and enjoy their products. But looking deeper we find a company with excellent operational skills and a line of products that are direct beneficiaries of the COVID-19 pandemic. Sadly I had to trim some shares this year because we owned too much and we needed to raise cash.
"One of the direct beneficiaries of the pandemic is a vehicle suspension company"
Over the past month Fox Factory stock has rallied +70.58%. Today we saw the stock rally 10%.
Factories closed, racing cancelled, parks where mountain bikers go closed, camp grounds closed, 35 million unemployed; how could this maker of bike, motorcycle, truck, ATV and marine suspension components possibly endure?
On May 6th, Fox Factory delivered Q1 earnings and achieved record first quarter sales of $184.4 Million. Normally a manufacturing company that was challenged would describe the environment as having headwinds. Fox announced that COVID-19 forced them to shut down production and close factories. The impact was material, but Fox seemed to have the wind at their back and filling their sails. So what happened?
Four months ago Fox Factory Holding Corp. announced a definitive agreement to acquire SCA Performance Holdings, Inc., a leading specialty vehicle manufacturer for light duty trucks and SUVs. The transaction was expected to close late in the first quarter of fiscal 2020, subject to customary closing conditions, and to be accretive to FOX’s fiscal 2020 financial results. For most investors this appeared run-of-the-mill and frankly boring. But for those that have followed Fox for a long time know that they have a solid track record of making good acquisitions, at bargain prices and the new business becomes almost immediately accretive to Fox Factory revenues. During the May 6th earnings call we learned that the SCA acquisition was in fact already accretive. Any acquisition by this company should be viewed as material and important to the stock price.
Fox has several OEM customers that are direct beneficiaries of the quarantine. In particular, motorcycle and ATV maker Polaris Industries, Ford, Indian Motorcycles, Kawasaki, Jeep, Triumph, Arctic Cat and Yamaha. Bicycle makers like Specialized, Cannondale, Scott and Trek. In addition Fox is opening markets into motorhomes, semi-trucks, marine and military vehicles. The stay at home trend has evolved into people wanting to get outside more than ever. That desire translated in to better sales for motorcycles, ATV's, RV's and boats from the major OEM's that buy from Fox.
The commentary from CEO's at Winnebago, Thor, Polaris and others is that RV's, motorcycles and ATVs are being purchased for the entire family to be able to get outside, have fun and still maintain social distancing.
Catalyst #3 (yet to come)
Analysts are expecting Fox to continue to improve earnings through the end of 2020, but the outlook for 2021 isn't as rosy. However, we don't have long term guidance from the company. Considering the products that Fox sells, I have to expect that purchases made this year will generate sales next year. Fox makes a consumable product. While the quality of Fox products is very high, suspension is one of those things that wear out due to the extreme environment that shocks live in, especially off-road shocks. 2021 is a year when we should see a return to off-road and on-road racing, two sectors where Fox dominates and their products are used in quantity. Mountain bike shocks are ever evolving. For the enthusiast, replacing the suspension parts on a mountain bike is not a prohibitive expense. My belief is that 2021 isn't a year for decline, but rather all the factory that benefit the Fox business should come together to provide more surprise earnings to the upside.
So while analysts are calling for a decline in earnings, sales growth is expected to rise from +1.60% in 2020 to +15.00% for 2021.
Fox Factory is expensive at these levels, trading at an all time high of $91.77 and a trailing P/E of 38.22. Looking at the technicals, Fox has a relative strength index of 78, anything above 80 is thin air and is likely to pull back. FOX closed today at $88.67 and appears to have support at $78.33.
I'll be watching Fox closely and may trim again to capture these profits, but I'll only do so with the expectation of buying the stock back at lower prices.
"Markets don't go to zero, Portfolio's do.
Buy quality, be patient...and look twice for motorcycles."
- Clay Baker
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Keep Me Honest 2020
Today is a good time to carefully leg into stocks again (3-20-2020).
Worst Case: S&P 500 decline further to around 2,100 - 2,150 (3-28-2020).
Middle Case: S&P 500 level out around 2,650 - 2,700 (3-28-2020).
Best Case: YE S&P 500 eventually rise to around 3,000 - 3,200 (3-28-2020).
Market bottomed March 23, 2020 at S&P 500 2,237.40 (4-17-2020).