Leatt (LEAT) is a fast growing microcap that has undergone a recent pullback, presenting an attractive entry point at the company's current valuation.
What does Leatt do?
Leatt designs, develops, markets and distributes personal protective equipment for participants in all forms of motor sports and leisure activities, including riders of motorcycles, bicycles, snowmobiles and ATVs, as well as racing car drivers. Items include neck braces and protective helmets. The company is also an OEM for neck braces sold by other brands.
How did Leatt get started?
The story of how Leatt got started sounds like something you'd hear on a Shark Tank pitch. In 2001 the founder of Leatt, Dr. Leatt, witnessed the death of his son’s friend who was riding with him. That was when he decided to create a safety products to protect riders. By 2004, the first Leatt neck braces were sold in South Africa. Dr. Chris Leatt was a doctor practicing in South Africa, which was why he started the business there. In 2006, the neck braces were mass produced and introduced at a motorcycle conference in Germany. In 2009, Leatt received the SAMIA Award for Outstanding Safety Achievement and continues to be featured in many sports magazines.
What are neck braces?
Technically speaking, “The premise of a neck brace is to redirect some of the forces that would stress the neck through alternate load paths into other areas of the body. Secondarily, a neck brace could limit extreme ranges of motion of the neck in instances when the neck is injured, SCI has not yet occurred, but the rider is still mid-crash. A good neck brace should be able to slow the head in a controlled manner, and have failure points where the brace will break or deform, under extreme forces, so that it cannot cause damage to the rider.” (Dirtrider)
Here is an article from Dirtrider which gets into the the very technical scientific explanations for why a neck brace is beneficial.
Ever since the neck brace was unveiled by Dr. Leatt in 2014, motorcycle safety standards have reached new heights.
Below are awards given to the Leatt neck brace:
- RacerX's 2007 "Product of the Year"
- Motocross Action awarded the device a 5/5 star rating in 2007
- Motocross Action readers voted the Leatt-Brace "Product of the Decade" in 2009
- Ryan Dungey won the 2010 Supercross Championship wearing the Leatt-Brace
Of course, the Leatt neck brace is not just for motorcyclists. The 10-K states, “The Company currently markets and sells seven models of Leatt-Brace® products which bring the safety benefits of the Leatt-Brace® technology to a large group of sports participants: our GPX model for off- road motorcycle use; our DBX model, for downhill and BMX bicycle use; our SNX model for snowmobile use; our STX model for adventure riders, street commuters and Speedway participants; our Kart model for go karting; and our Fusion model which incorporates the neck brace with body protection.”
Below is a short video made by Leatt about the history of the Leatt neck braces explained by Dr. Leatt himself.
...and a comparison guide for buying neck braces.
Over the years, Leatt has also started selling body armors and helmets. Here's a timeline of some products they've introduced:
- 2010: Launched the Leatt Body Armor Range with the introduction of the Leatt Adventure Chest Protector, a hard shell chest protector.
- 2011: Introduced junior protectors, body vests and full body protectors, since then we have extended our range further to include more body protectors and vests, back protectors, elbow guards, knee guards and cooling vest.
- 2014: Expanded range of body protection to meet the consumers need based on market feedback
- 2015: Expanded range of body protection into new markets by adding gloves to this category
- 2015: Launched helmet range and commenced shipment of new helmet
Some Pictures of Products and Prices
Notice that these are very expensive items so Leatt is clearly targeting the high end market. Note that the low reviews are not indicative of low volume sales Leatt conducts almost all of its business through OEM and they got 50 more SKUs of products with different designs and prices. And for the same reason, these are obviously not the average selling price.
Leatt Corporate Structure
**Financials in thousands, 000, except for earnings per share
Several things to point out from the financials:
- 1 for 25 Reverse stock split in 2012
- Not recession resistant, as shown by huge revenue decline in 2009
- Company only started filing 10Ks in 2012, so much of the increase in operating expense was due to accounting regulations
- Body armor has lower margins than neck braces, which is why margins have been trending down.
- Company has huge operating leverage; even single digit increases in revenue will lead to double digit net income growth.
Per the latest 10-K, Leatt derived 40% of its revenue from neck braces, 47% from body armor and 8% from helmets. What is more interesting to note though is the fact that the helmet segment was nonexistent before 2015 and the company was able to sell over 1.4 million dollars’ worth of helmets during its first year on the market.
The trends of these different sources of revenue has also been interesting.
Neck braces seem to be saturated and are mostly declining. There are good reasons to believe the decline has bottomed out according to the latest PR. It is still incredible when you take into account the fact that the company has no neck brace sales in 2004 and went to a peak of over 15 million dollars recently. While sales of neck braces may no longer return to its peak, the company was able to leverage its brand name recognition to successfully enter the body armor market. You can see that the company started with nothing in 2010 and sold over $8 million worth of neck braces in 2015.
Will the company be just as successful with the introduction of helmets? No one knows, but they are definitely gaining traction and management seems very capable at execution of launching new products. In their investor presentation 2 years ago, management demonstrated that they can successfully enter new markets:
Quotes from 2015 Q4 Press Release:
“We had a strong 2015 in all aspects of our business, including operations, execution and new product introductions,” said CEO Sean Macdonald. “All our product categories showed growth except our neck braces at the end of the year, and that was only due to an unusual one-time event. We are particularly excited about the reception received by our new innovative, lightweight helmets in the media and industry overall. We think that our helmets are a potentially game-changing product for us and expect that they will join our classic neck braces as life-saving and career-saving protective devices that carry on the original intent of the Leatt Brace and the global Leatt brand.
Macdonald continued, “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.”
Quotes from 2016 Q1 Press Release:
“We are very pleased with the initial sales of our innovative line of helmets and believe that they will continue to gain traction with consumers in 2016. They are a potentially game-changing development for the Company that we believe will become as important to the Company as our original neck brace.
The Company previously announced that it was actively developing and expanding its dealer network. “Sales through our B2B portal for dealers in the US is beginning to pick up speed as dealers can easily place orders online. This allows our sales managers to get out of the office and meet dealers and sales representatives face-to face, build relationships and offer technical support. It also ensures that the Leatt brand is properly represented in the market place,” added Macdonald.”
Sales of mature product lines like the neck brace and helmet may be impacted by the strong US dollar. Part of the decline was primarily due to strong neck brace sales in 2015 Q1 and the fact that Q1 is also the seasonally weakest quarter. What is impressive here is how fast the helmets are taking off.
I will not bother with projections because small changes in costs or revenue will throw off my net income projections. It is enough to know that if Leatt can grow helmets rapidly and keep the decline of neck braces to a minimum, there will be huge upside in the next 2 years. Another scenario would be that helmet sales take off, while the neck braces continue to decline, offsetting gains in the helmet segment. In that case, the stock will probably be dead for a while. The least likely scenario would be that neck braces decline and that sale of helmets do not take off as fast as expected.
Dr. Leatt has a separate company that owns the patent to the neck braces and Leatt has to pay that company 4% of neck brace sales as royalty. This is a slight conflict of interest. On the other hand, Leatt is incentivized to have strong neck brace sales as Dr. Leatt also owns 40% of LEAT.
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