The Elevator Pitch

Leatt is a small company aiming to grow significantly by expanding into more products and end markets by continuing to invest in R&D and raising the value and awareness of its brand. It has strong insider ownership, the founder remains active in R&D, and the business has the ability to benefit from operational leverage going forward. The business quality is good, the management appears to be strong and the price today seems good to reasonable.

What They Do

Leatt outfits athletes from head to toe with protection. Initially starting with a neck brace for motocross, the company has spread out and broadened its horizons to more gear and more sports. It now sells helmets, knee braces, gloves, chest and body protection, goggles and other tangential equipment and apparel. It designs its own products with the leadership of its founder, Dr. Chris Leatt.

Its products are mostly manufactured in China through contracts with vendors and it has distribution all over the world through sellers and distributors and online via its own store. Its main office is headquartered in South Africa but it has offices in California to support North American sales. It plans to continue the expansion of its offerings to more products and to more sports to support growth and the brand.

“Our plan is to continue to develop innovative, cutting edge products; move into high velocity winter and team sports; and address a broader range of bicycle and other popular helmeted sports”

- Mission and Strategy statement from Leatt Corp website

The business is traded on the OTC as LEAT. It has a market cap of 170 million USD and an EV of 160 million USD (roughly as of time of writing).

Business Quality

The business enjoys gross margins around 45%. Cash flows from operations have grown as the revenues have grown. The business has been investing in R&D consistently over the past decade and it appears to be paying off with very good sales growth.

It appears that the focus on expanding the product line to support continued revenue growth has been working as the returns on equity and invested capital have increased nicely over the past couple of years. This is likely a good demonstration of the business getting to scale. It is benefiting from some operational leverage; the cost of R&D being relatively fixed and the brand awareness growing as the sales increase, allowing more of the revenue to go to the bottom line without significant ramping of costs.

As can be seen, there is a wide offering of protective gear that shares the bulk of the revenues currently. Body armor and knee braces bringing home the bulk of the sales while others contribute significantly.

The Industry

The company is making headway into other markets beyond their home-base of moto. In 2010s they moved into the MTB arena and continue to do well there, offering more and more quality products and gaining some market share. This is a big market and there is plenty of room to grow. The other thing about these customers is that some will be first time users of some of these products, and it is hard to imagine a trend reversal - you wouldn’t start wearing protective gear only to go back to not wearing it. It’s becoming normalized in modern society to be fully protected for these activities. So even if the sports don’t grow drastically, the market could still grow considerably.

The business is actually very diverse in its sales. It sells through third party distributors across the globe and via its own sales channel online. It has sales spread out across the globe, with no one region making up a majority of sales.

The Brand

Over time, the product line has grown tremendously. Starting with a neck brace and then moving into lots of other gear along the way. It has rapidly expanded its offerings over the last few years and that has greatly expanded the brand’s reach, it seems. The company continues to focus its efforts on further R&D with the Leatt Lab, headed by its founder.

The products do appear to be competitive and well received by the customer base. Helmets and gear do have a good niche in that if you are a customer who trusts the brand, you are willing to pay a fair price to get what you want. Considering the health and comfort implications for these products and that these activities are not for those who aren’t willing to spend a few bucks, it would seem like a good business to be in. The gross margins of 45% would support that argument. The gross margins have declined somewhat over the past few years (slowly and steadily) but I assume that is related to their expanded product offering into some products with lower margins (apparel for instance).

The products have some good competition but a limited number of real threats that would outright dominate any individual market. Its competition includes Bell, EVS and FOX. Leatt does not have a large penetration of the market yet so could grow considerably by taking even a small market share from a larger competitor like FOX.

The brand should be a reasonable intangible asset that will provide some moat for sales against newcomers. More cash from operations will still be required to sustain the brand but less than the initial inertia and time required to build trust with customers. It also has patents on a lot its products that provide some level of moat, albeit not a great one. It should also benefit from some of the regulatory hurdles that are required to get through selling some of the protective gear such as helmets.

Management Quality

Having the founder continuing to work on the product side while a CEO has come in to manage the business and capital allocation for growth appears to be working well.

The CEO, Sean MacDonald, came into the business in 2010 when the company started to grow into other areas beyond the initial neck brace for moto. He has done very well while at the helm, while Dr. Leatt has stayed on as Chair. He owns 4.8% of the common shares.

Dr. Leatt continues to run the R&D and his founding story still rings true to the mission statement of the company - to save lives! Leatt has a relatively small salary and a stock incentive plan. He owns 39% of the common shares but also receives royalties for use of some of the patents which he owns through another corporation.

Insiders makeup 43% of the common shares, while large outside owners make up another 15%, leaving only roughly 47% outstanding for the remaining public float. The means that insiders are well aligned with high ownership and there is low float available with a small market cap.

Valuation

While I wouldn’t count on the type of growth that 2020 has brought, it seems reasonable that growth will continue into the future for some time, likely even several years at a reasonable rate. I believe if the business is smart in continuing to spend on R&D, the brand will become even more valuable and the operating leverage should continue to pour more down to the bottom line.

Currently, the stock trades around 18 times earnings and if you apply some reasonable growth growth assumption without needing to raise equity in a dilutive fashion, the price paid now seems good to reasonable.

There could be lots of volatility in this stock in both directions due to the illiquid nature of it. The average volume per day stands around 7,500 shares.

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Note: At the time of writing I don’t own any shares.

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