We recently initiated a position in Fox Factory Holding, a leading manufacturer of highly engineered suspension systems for mountain bikes, trucks, ATVs, and other sporting vehicles. Our view is that its current share price, which came back down to earth after skyrocketing during the pandemic, does not reflect the value of its long-term growth prospects. We think the company has a lengthy runway to compound earnings growth, which is being catalyzed by secular themes such as electrification, digitization, and connectivity. Its legacy bike business has attractive growth prospects from the advent of e-bikes and increasingly connected suspension systems, while there is room for market share gains with automotive original equipment manufacturers (OEMs) for spec-in shocks.

The company traces its origins to Bob Fox, an amateur motocross racer and mechanical engineer who revolutionized the motocross industry in 1975 with the invention of the Fox AirShox. Sales catapulted from 200 units in 1976 to 10,000 in 1978 after racers who used these shocks won the 1976 and 1977 National Motocross Championship. Fast forward to today, and Fox shocks continue to dominate podiums in areas such as mountain biking and off-road trucking. The company’s product development focus on keeping professional racers winning podiums has created a loyal following down market of repeat-purchasing enthusiasts who want best-in-class products—and is a key reason for the company’s success over time.

Today, Fox Factory commands half of the mountain bike fork market, which accounts for approximately half of its revenues and earnings. We see a massive growth opportunity for the company as it has been applying its suspension capabilities and well known brand to the truck market via continued OEM spec-ins, newly upfitted (custom built) vehicles, and supplying dealers with the equipment to upfit used trucks. Computerization is also making it increasingly difficult for smaller shops to service trucks given the challenges in replicating suspension technology, brand, dealer relationships, and scale within the fragmented new and used truck upfit industry—which enhances Fox Factory’s opportunity.

Light trucks and SUVs remain by far the most popular vehicles in the U.S., accounting for 75% of new vehicle sales in 2019 and expected to increase further. In addition, we estimate that approximately one-third of the 160 million trucks in the car parc has some kind of lift kit suspension package. Fox Factory entered the new power vehicle market in 2008 via a partnership with Ford to supply branded shocks for its F-150 Raptor model, and there are additional opportunities to extend to other Ford models such as the Bronco Raptor, new OEMs such as Toyota, and electric models—which tend to need more suspension systems given their heavier weight—as well as to international regions such as the Middle East and Australia, where off-road trucking is popular.

Between 2014 and 2020, Fox Factory embarked on a vertical integration strategy with several acquisitions that made it the largest player in the higher-margin manufacturing and distribution of new upfitted vehicles. This process takes chassis from the OEM that are then custom manufactured with Fox shocks, lift kits, and wheels and sold directly to dealers. Because Fox Factory now controls the manufacturing and has a majority share in the sale of these upfitted vehicles, it can ensure its premier products—including shocks, lift kits, and wheels—are put on the vehicle. Given the popularity of these trucks (and their appeal to dealers thanks to the traffic they create), we think that Fox Factory can multiply revenues in this business by expanding dealer relationships—as well as owning more of the content involved in the upfitting process.

An additional opportunity exists in supplying dealers with the shocks, lift kits, wheels, and other content needed to upfit a used truck. This is a large, fragmented market that is currently being serviced by small job shops. However, computerization and digitization is shifting this valuable service to the dealerships due to the necessary technological capabilities. Fox Factory is enviably positioned to sell a complete lift kit solution to these dealers due to its existing relationships from the new upfitted trucks and the preference dealers have for a one-stop shop of equipment vendors.

Longer-term, Fox Factory has further opportunities to benefit from more connected suspension systems. It recently launched Live Valve, a technology that enables a bike rider to simply press a button that allows the shock to automatically recalibrate to a given terrain via sensors which use thousands of data points accumulated from other riders. Live Valve is now being expanded to trucks, which provides valuable feedback to riders and to Fox Factory’s new product development team. The company has also had success in applying its suspension technology to other markets like off-road RVs, military, and marine.

Not only do we think there is a clear path to growth with current opportunity set in power vehicles, but Fox Factory is also a business with a history of successfully expanding its core suspension technology into new applications, including those where it would be overwhelmingly difficult for a competitor to replicate the technological know-how and brand awareness accumulated for nearly 50 years.

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