Protective Racing Gear Manufacturer Leatt Corp Aims For Double-Digit Growth
Leatt Corp. (LEAT – $2.90) designs and markets personal protective equipment to the extreme sports industry. Their equipment is primarily marketed to motorsport athletes and riders of motorcycles, snowmobiles, ATV’s, and race car drivers. Leatt’s products are sold worldwide to distributors and retailers.
The Company was incorporated as a shell company in 2005 under the name Treadzone. By 2006, it acquired the exclusive rights to manufacture, distribute and sell LEAT’s flagship product, the Leatt Brace. The Company is headquartered in Cape Town, South Africa.
Investment Thesis
The investment thesis in LEAT is based upon double digit top line growth, due to the release of a new product line and incremental growth from older legacy products. Furthermore, LEAT has low absolute fixed costs and higher revenues should not result in too much higher variable costs. With expected revenue growth in 2016-2017 and translatable bottom line expansion, buying shares of the Company now makes for a compelling investment.
Market
What makes LEAT a very interesting security is the Company’s captured market share. According to a Racer X Illustrated magazine survey, Leatt has a 58.9% and 15.7% market share for neck braces and chest protectors respectively in the U.S. off road motorcycle market. The US market represents approximately 50% of the worldwide off road motorcycle market. In the same Racer X survey, it is estimated that 52% of riders still do not own/wear a neck brace, leaving a large untapped market for growth.
THE LEATT NECK BRACE
The Company’s revolutionary neck brace was invented by its founder and current Chairman, Dr. Christopher Leatt to protect from catastrophic neck injuries. After he witnessed the death of a fellow off-road motorcycle rider the weekend after his son’s riding debut, he started designing the revolutionary brace.
The Leatt-Brace is a prophylactic neck bracing system composed of various combinations of carbon fiber, glass fiber, polycarbonate or glass filled nylon. It has been designed as to offer neck protection to all who utilize a crash helmet, including soldiers, law enforcement officers and other professionals whose activities could result in cervical spine injury.
No One Trick Pony
Judging by Leatt’s immense success in the neck brace category, and by the fact that everyone in the extreme sports industry knows LEAT as ‘the neck brace Company’ one might think this is a one-trick pony. But nothing could be further from the truth.
The past few years, the Company has significantly expanded into complimentary protection products. In fact, in fiscal year 2015, ended December 31, 2015, approximately 47% of the Company’s total revenues were derived from selling body armor, such as chest and body protectors, kidney belts or knee guards.
| Fiscal Year Ended December 31 | ||||
| Amounts in $000’s | 2015 | % of Revenues | 2014 | % of Revenues |
| Neck Braces | 7,431 | 40 | 9,800 | 53 |
| Body Armor | 8,540 | 47 | 7,812 | 23,496 |
| Helmets | 1,431 | 8 | – | 0 |
| Other Products | 941 | 5 | 848 | 5 |
| Total | 18,343 | 100 | 18,459 | 100 |
| Revenues by product line for the years ended December 31, 2015 and 2014. Source: Company Filing. | ||||
Interestingly, the Company should continue to see an uptick in body armor sales from the release of protective gloves in 2015. In addition, in the fourth quarter of 2015, Leatt’s brand new helmet line hit the market and immediately generated over $1.4 million in sales in just three months. What’s more, their new helmet was the winner of a prestigious 2016 Design and Innovation award.
An additional avenue for top line growth is the FDA and Medicines and Healthcare Products Regulatory Agency (equivalent of the FDA in the United Kingdom) approval for the shoulder brace and knee brace in the first quarter of 2015.
These approvals allow the Company to expand its product reach and to penetrate into new markets. The Company plans on taking these registrations directly to the market as medical devices/products. Moreover, in the relative future, we may see Leatt products for the use of recuperation of surgery, injury, muscle tear, dislocations, and breaks and fractures.
All in all, the Company has become one of the best protective product makers in today’s extreme sports market. As the Company continues to introduce new high-tech protective gear, more market share will be gained, resulting in a more valuable business model.
What Is Going On?
Between August 2014 and October 2015, Leatt’s stock price has increased fivefold, giving investors a very impressive return. However, during the past six months, the stock has fallen close to 50%.
After conducting market research and subsequently seeing the multiples the market priced into Leatt at its peak, it’s clear that a pessimistic selloff was trigged by subpar top line results for the recent full year. For fiscal year of 2015, revenues fell $115,756 or 0.6% YOY.
Mediocre revenue results are primarily attributed to a $2.37 million decrease in neck brace sales. The 24% drop in neck brace revenues is a result of a decrease in overall volume in the US and abroad. For the US, the decrease was due to a lack of sales to OEM customers. Abroad, sales were negatively affected by the strengthening US Dollar.
However, it’s important to take into consideration that the decrease in neck braces was from one-time events…
As Sean Macdonald, Leatt’s Chief Executive Officer said during the fourth quarter and full year 2015 conference call, “As we mentioned last year, we expected our fourth quarter sales to be less robust than prior periods due to our decision to ship initial orders of our 2016 product line during the 2015 third quarter, as well as a decrease in OEM revenues. We still believe that these are one-time events and that our long term strategy for sustained growth is sound.”
Providing light in the face of these challenges is the 9% increase in the body armor sales and the newly introduced helmet segment, which captured 8% of consolidated revenues in 2015. Given that the helmet line generated $1,431,090 in sales in just one quarter, we can theorize that the Company will do ~$5.7 million in the helmet line in 2016. Using the $18.3 million 2015 revenue run-rate, if the Company brings in $5.7 million in Helmet revenue for 2016, total sales could increase to $24 million or a 31% increase YOY.
What we have now is a Company that missed short-term expectations from growth oriented investors, was punished with a ~50% correction and is now sitting in value territory with potential for double digit top line growth.
Margins Bound to Increase as Leatt Grows
LEAT has really impressive gross margins of 52.4%, but when navigating down towards the bottom line, margins become less desirable. However, that shouldn’t really come as a surprise, given the absolute small size of LEAT.
| Fiscal Year Ended December 31 | ||||
| Amounts in $000’s | 2015 | 2014 | ||
| Revenues | 18,343 | 18,459 | ||
| Cost of Revenues | 8,741 | 8,637 | ||
| Gross Profit | 9,602 | 9,822 | ||
| Salaries & Wages | 2,226 | 2,302 | ||
| Professional Fees | 846 | 1,118 | ||
| Advertising & Marketing | 1,498 | 1,442 | ||
| Research & Development | 1,180 | 1,222 | ||
| General & Administrative | 1,794 | 2,081 | ||
| Total Operating Expenses | 8,856 | 9,372 | ||
| Income Before Income Taxes | 961 | 652 | ||
| Income Taxes | 386 | 224 | ||
| Net Income | 575 | 418 | ||
| Earnings (Loss) Per Share | 0.11 | 0.08 | ||
| Shares Out. – Diluted | 5,537 | 5,201 | ||
| Most important income statement data for the fiscal years ending December 31, 2015 and December 31, 2014. Source: Company Filing | ||||
From looking at the income statement, we can see that the biggest margin eaters are Salaries and Wages, Advertising and Marketing, R&D and G&A. What’s interesting though, is that if you look at what makes up Operating Expenses, the good majority of these expenses should stay relatively flat as revenues increase. In short, this means that incremental revenue growth will translate to a more impressive bottom line.
For an example on how Operating Expenses could stay relatively flat going forward, check out the operating results back in 2013, when revenues were ~18% lower.
| Fiscal Year Ended December 31 | |||||
| Amounts in $000’s | 2015 | 2013 | % Difference | ||
| Revenues | 18,343 | 14,892 | +23 | ||
| Cost of Revenues | 8,741 | 7,159 | +22 | ||
| Gross Profit | 9,602 | 7,733 | +24 | ||
| Salaries & Wages | 2,226 | 2,135 | +4 | ||
| Professional Fees | 846 | 1,229 | -31 | ||
| Advertising & Marketing | 1,498 | 1,492 | 0 | ||
| Research & Development | 1,180 | 1,170 | 0 | ||
| General & Administrative | 1,794 | 2,097 | -14 | ||
| Total Operating Expenses | 8,856 | 9,254 | -4 | ||
| Income (Loss) Before Income Taxes | 961 | (547) | +276 | ||
| Income Taxes | 386 | (171) | +326 | ||
| Net Income (Loss) | 575 | (375) | +253 | ||
| Earnings (Loss) Per Share | 0.11 | (0.07) | +257 | ||
| Shares Out. – Diluted | 5,537 | 5,201 | +6 | ||
| Most important income statement data for the fiscal years ending December 31, 2015 and December 31, 2013. Source: Company Filing | |||||
What’s impressive is that the Company has continued to cut expenses while growing its top line in the past few years. Additionally, in the most recent year, operating profit and net income are up 45% and 37%, respectively. As the Company continues to grow its top line, there is a decent suggestion that the bottom line will expand…at a pretty good rate.
Conclusion
LEAT is one of the most interesting securities that I have ever analyzed. The Company has very innovate products that continue to take market share from other companies. Thanks to the new helmet line, there is real potential for top line growth, coupled with bottom line expansion.
Finally, the Company is properly capitalized which helps to mitigate almost all balance sheet risks and absolute capital loss. These are enough elements for us to expect significant upside in the next 12-24 months. Buy recommendation.
| Sign up for our weekly e-mail newsletter and be the first to receive our best ideas and updates. |
| For important disclosures, please read our disclaimer. |