Marucci Acquisition And OEM Vehicle Launches Will Drive Future Profitability

Key Takeaways

• Fox Factory's cost management and operational optimization efforts aim to enhance margins and drive future profitability by improving efficiency and reducing nonperforming products.
  
• Strategic market expansion, acquisitions, and partnerships are expected to broaden Fox Factory's market, boost revenue growth, and stabilize earnings despite OEM volatility.
  
• Macroeconomic factors, production challenges, and increased expenses could threaten Fox Factory's revenue growth and profitability in the short term.

Catalysts

Designs, engineers, manufactures, and markets performance-defining products and system worldwide.

• Fox Factory has initiated aggressive cost management strategies, including the reduction of controllable costs across its corporate structure and plants, which are designed to enhance margins and drive future profitability. This is expected to positively impact net margins and earnings.
  
• The simplification and consolidation of Fox Factory’s operational footprint, alongside the reduction and elimination of nonperforming products, are efforts aimed at improving operational efficiency. These are likely catalysts for margin improvement.
  
• The company's strategic expansion into new markets, such as the entry premium bike segment, the acquisition of Marucci, and partnerships like the MLB, are positioned to broaden its addressable market. This is expected to drive future revenue growth.
  
• With the challenges faced by OEM partners beginning to abate, including quality issues and model year changeovers, Fox Factory expects improved revenue from these partnerships as new model year vehicles begin to ship.
  
• Fox Factory is focused on growing its aftermarket applications group and leveraging recent product launches and partnerships. This strategic shift is anticipated to increase revenue and diversify the company’s income streams, potentially stabilizing earnings despite OEM volatility.

Fox Factory Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fox Factory Holding's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.8% today to 7.2% in 3 years time.
• Analysts expect earnings to reach $113.5 million (and earnings per share of $2.74) by about December 2027, up from $10.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.4x on those 2027 earnings, down from 117.9x today. This future PE is lower than the current PE for the US Auto Components industry at 18.6x.
• Analysts expect the number of shares outstanding to decline by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.34%, as per the Simply Wall St company report.

Fox Factory Holding Future Earnings Per Share Growth

Risks

• Reduced forecast from OEM partners and overall reduced demand due to macroeconomic factors could impact Fox Factory's future revenues.
  
• Ongoing quality issues and production delays at automotive OEM partners are affecting inventory and production, which could negatively affect Fox Factory’s net margins.
  
• Increased operating expenses, both from the acquisition of Marucci and other expenses, could pressure earnings and reduce profitability in the short-term.
  
• The decline in demand for larger ticket items in the powersports market and across the automotive sector can result in lower sales volumes, impacting revenue growth.
  
• Required accelerated inventory optimization in AAG might affect short-term margins and indicates potential excess inventory concerns, impacting cash flow management.

Valuation

• The analysts have a consensus price target of $40.12 for Fox Factory Holding based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $50.0, and the most bearish reporting a price target of just $32.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.6 billion, earnings will come to $113.5 million, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 8.3%.
• Given the current share price of $30.39, the analyst's price target of $40.12 is 24.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.