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The foundation of Leatt’s business is the intellectual property developed by Dr. Christopher Leatt whose purpose is to mitigate or prevent serious injuries in the pursuit of various risky activities, including high velocity extreme sports such as motorcycle racing. Initially, the Company focused on the neck braces he developed, and it has blossomed into a source of head-to-toe protection.
In the exhibit below, note that Leatt has not only achieved an enviable degree of diversification in its product offerings, but that each of its individual product lines sustained remarkable growth in 2021 ranging from 72.9% to 133.9%.
Leatt’s profitability has grown apace with revenues – and then some. GAAP net income rose from $4,423,872 to $12,574,437 during 2021, an increase of 184%!
After achieving success in selling neck braces, Leatt introduced shoulder and knee brace products in 2014. In 2015 the knee brace was accepted for registration by the FDA, and the shoulder brace was accepted by the FDA as a Class 1 Medical Device. This was significant because FDA registration allows direct marketing as medical devices to non-athlete patients recuperating from surgeries, along with various other injuries such as muscle tears, dislocations, and fractures. 2015 also saw the Company’s introduction of helmets and gloves.
Targeting Motocross riders, 2019 brought the launching of the Flexlock Boot. This product was notable in its ability to reduce ankle and knee forces by up to 35% versus (according to Leatt 10-K) "an industry leading competitive boot."
The Company also launched Leatt Goggles in 2019. In keeping with its emphasis on product quality and innovative features, these goggles are anti-glare, anti-fog, and (per its 10-K) "bullet-proof tested to military ballistics standards for durability."
Other offerings of Leatt Apparel, primarily targeting off-road motorcycle and bicycle riders, include jackets, jerseys, pants, shorts, and socks. Apparel is currently the fastest growing of Leatt’s product categories.
In addition, the Company is active in the aftermarket for spare parts. Many of its products must be replaced from time to time due to normal wear and tear – or because of incidents involving significant impact.
Between 2020 and 2021, international customer revenues (mostly from U.S. accounts) grew from $24.7M to $52.3M, respectively representing 64% and 72% of total Leatt revenues. No customer accounted for more than 10% of 2021 consolidated revenues. Nor did any customer account for more than 2% of Leatt's account receivables as of 12/31/21.
Amazingly, the Company grew revenues by 87.7% in 2021 without increasing its advertising and marketing expense, which remained constant at $2.2M. I see this as an indication that Leatt products are not only a relatively easy sell, but also that competition in this space is relatively mild. (Harvard Business School professor Michael Porter cites the degree of competitive rivalry as one of the five key determinants of an industry’s profitability.)
Leatt had a global network of 55 distributors as of YE 2021, and there were a total of 854 active distributors and dealers in the U.S. at that time, along with 250 active dealers in South Africa. The Company remains active in recruiting additional quality members to enhance its distribution efforts.
Though the Company listed 30 areas of concern in its 10-K, I’ll focus on the ones that seem most germane, given Leatt’s business model and history of aggressive growth:
Leatt's conservative financial position (I e. having a current ratio over 2, very little debt, $5 million cash, and strong profitability) may well provide an adequate cushion to weather these threats. This war chest may, in fact, allow Leatt to gain market share from less prudent competitors when adverse economic, legislative, and political events disrupt the protective recreational gear industry.
As I stated in my book, Data Driven Investing, investment decisions that are not 100%-based upon objective, informed appraisal of value nearly always result in assets being inefficiently priced.
In the case of Leatt, we have a stock that typically swells in value when investors are given fresh information in the form of SEC filings – and typically goes nowhere when useful updated information is hard to come by. The most consistently available information in recent months when there have been no 10-Q’s or 10-K’s being filed is the (often daily) notification of insider selling by Christopher Leatt, which has been sufficient in volume (I believe) to drive LEAT significantly lower.
According to Fintel, Leatt sold 55,615 shares of LEAT over the course of several dozen trades between 12/8/21 and 4/22/22. Per Yahoo Finance, 596,800 shares of LEAT were traded between these two dates. In other words, Leatt’s sales amounted to 9.3% of all LEAT shares traded.
Aside from whatever this selling - in and of itself - has done to reduce the stock price, there has no doubt been a follow-on effect causing non-insiders to sell because they see Leatt doing it. In many cases, I’d imagine that they interpret Leatt’s sales and a stagnant (if not falling) stock price as a surefire sign that the next earnings report will be a stinker.
These investors, however, might well see things differently if they understood that Leatt’s selling was done in conjunction with a 10b5-1 plan. The gist of how these plans work is that insiders like Leatt are given a safe harbor from allegations of insider trading when they commit in advance to a plan for selling a pre-specified amount of their shares at pre-specified times.
His trades, therefore, are not based upon a “objective, informed appraisal of value” conducive to efficient pricing of LEAT stock. I stress that this does not make him a bad guy. In making the markets a little bit fairer for the rest of us, he is forcing himself to take what may well turn out to be very bad prices for his stock.
Since May 2020, in months when the company files 10-Q or 10-K reports, the stock has returned an average of 30.9% - vs. 3.2% in other months (see table below). Not only did this disparity exist in both years analyzed, but the amount of the disparity was also remarkably similar (27.2% vs. 28.3%).
Price patterns believed to be exploitable typically turn out to be the result of overly zealous data mining or attributable to circumstances too short-lived to generate profitable trades.
In the case of Leatt, there are fundamental reasons to believe that the disparity in returns between filing months and non-filing months might well persist into the future. I believe that the odds favor this conclusion, but there are no sure things in the world of stocks. Past performance is no guarantee of future returns.
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Disclosure: I/we have a beneficial long position in the shares of LEAT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Nothing in any Seeking Alpha articles (or other Seeking Alpha content) authored by me constitutes a recommendation by either Oyster River Financial, LLC or me to buy, sell or hold any specific security. Past performance does not guarantee future performance.