Global Courant
Concerns about a possible economic recession are roiling markets again. One stock that can weather the storm is Fox Factory. Fox Factory is known for making a wide range of products used in everything from bicycles to all-terrain vehicles to trucks. The stock is up just 3% year to date and has taken a hit in the past six months, losing 20%. That said, Fox’s high price tags for finished products, which attract eager buyers, could propel the stock forward even as the broader economy struggles. “It’s a little counterintuitive,” said B. Riley analyst Anna Glaessgen. Think of a truck with a $150,000 price tag: “That might not necessarily be where you want to invest in some kind of macro event,” she said. “But at the same time, it is the consumer who is the most resilient. And that is where we see demand proving to be the most resilient.” The enthusiastic upper-income consumer analysts highlighted two qualities in Fox’s consumer base that are helping the company weather a broader economic downturn. First of all, they are rich. Second, they invest in their hobbies. Higher-income consumers tend to do better during periods of economic turmoil. That’s a theme on many’s minds amid concerns about a possible recession linked to the Federal Reserve’s interest rate hike campaign. Truist analyst Michael Swartz said this wouldn’t be the first time the company has outperformed and been more resilient in tough economic times. He pointed to the 2008 financial crisis: Fox’s revenue bottomed after declining about 8% year-over-year, while broader-based end markets saw demand drop 30% to 40%. The stock also performed well during the fallout from the Covid-19 pandemic. In 2020, the share rose by more than 51%. The following year it rose another 61%. Retail sales more broadly got a boost during the pandemic as fiscal and monetary stimulus boosted consumer spending and shutdowns prompted people to buy more goods. But as the economy reopened and inflation began to hit pockets, companies struggled to get consumers to buy their products. B. Riley’s Glaessgen said Fox is largely immune to this problem, as their products are aimed at enthusiasts rather than passive participants in a hobby. The company’s “sticky” consumer base caught the attention of Motley Fool Asset Management’s Shelby McFaddin, whose Small-Cap Growth ETF (TMFS) holds the stock. “Specialty operations tend to have higher income and lower income elasticity” in the customer base, McFaddin said. “They are a bit cyclical when we think about the business cycle, but they are not that sensitive.” One of the company’s activities – cycling – provides a case study of this persistence. Bicycle makers and sellers have struggled following the Covid-19-induced boom. Consumers who bought bikes during the pandemic to exercise safely may not have needed new ones yet — or may have given up on the hobby altogether when their gyms or training studios reopened. Either scenario could make sales difficult to sustain at the height of the pandemic. However, Fox’s focus is on mountain bikes, which tend to be more expensive. While mountain bikes may not have seen the same influx of consumers as a more relaxed bike during the pandemic, Glaessgen said the high barrier to entry creates a base that is more involved and less of a revolving door. “That’s the type of person who would theoretically be less likely to participate in that sport that they clearly care deeply about,” Glaessgen said. She added that the same thought process can be used when looking at powersports and off-road vehicles, the company’s other major businesses. A ‘favorite idea’ Other reasons to like Fox include its strong brand, solid management and a favorable business model, according to Truist’s Swartz. He also said that the focus on premium products should become more popular in the long term as vehicles become more capable and thus require better technology. While there are no competitors that cover exactly the same target as Fox Factory, both Swartz and Glaessgen noted SRAM’s RockShox. It is the closest competitor in bicycle suspensions, which are typically used on mountain bikes to soften rough terrain. But it is privately held, forcing Swartz to conclude that there are no directly comparable companies that are publicly traded. The stock has underperformed the broader market this year. Stocks also struggled in 2022 and were especially hard hit when the market soured, falling 46.4%. The past two years have marked a reversal from the big gains of the past seven years. Despite the difficult period, Wall Street analysts are optimistic about the shares. According to LSEG, the average analyst has a buy rating and a private objective that imply an upside of more than 31%. Sure, there are variables that can affect performance. Most notably, Glaessgen said the company’s auto operations are tied to Ford and Stellantis’ Jeep models, leaving them exposed to the United Auto Workers strike that began earlier this month. “Investors will need to consider short-term volatility that is beyond the company’s control and independent of their fundamental performance,” she said, referring to the UAW strikes. “But over the long term, we absolutely love this company, see substantial growth opportunities ahead and view it as our favorite idea in our coverage universe.”
