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Fox Factory Holding (NASDAQ:FOXF) made its public debut on Thursday, August the 8th. Shares of the manufacturer of high-performance suspension products, ended their first day with gains of 24.1% at $18.61 per share.

After the public offering, shares trade at elevated levels. Based on the very high price-earnings multiples, I remain on the sidelines.

The Public Offering

Fox Factory Holding is a designer and manufacturer of high performance suspension products which are used on mountain bikes, both on- and off-road vehicles, snowmobiles and motorcycles.

The suspensions of the company improve performance of vehicles and control by the riders. Its produces are widely used among professionals on key events like the X Games.

Fox Factory Holding sold 8.6 million shares for $15 apiece, thereby raising $129 million in gross proceeds. The company itself will sell merely 2.9 million shares raising $43 million in gross proceeds. The remainder of the shares are being offered by selling shareholders.

The public offering values the equity of the firm at $544 million. The offering took place at the high end of the preliminary $13-$15 offer range.

Some 24% of the total shares were offered in the public offering. At Friday's closing price of $18.50 per share, the firm is valued around $671 million.

The major banks that brought the company public were Baird, William Blair, Piper Jaffray, Stifel and BB&T Capital Markets, among others.

Valuation

Fox Factory sells its suspension products at premium prices which are marketed to leading original equipment manufactures (OEM). Key OEM customers include Trek in the mountain bike area, and Ford (NYSE:F) and Polaris (NYSE:PII) in the powered vehicle area.

Fox sells its suspersions to some 150 OEMs and distributes to more than 2,300 retail dealers. Sales are still heavily skewed to OEM customers, which make up 81% of total revenues.

For the year 2012, Fox Factory generated annual revenues of $235.9 million, up 19.3% on the year before. Net earning rose by 5.0% to $14.2 million.

First quarter revenues were up by 20.2% to $54.9 million. Net profits rose by 34.5% to $3.5 million.

Fox Factory operates with merely $0.1 million in cash and equivalents and $52.8 million in total debt. Factoring in the $43 million in gross proceeds from the public offering and the company will operate with a net debt position of around $15 million. Fox will use the proceeds from the offering to pay off existing debt.

The market values Fox Factory at 2.8 times annual revenues and 48 times annual earnings.

Investment Thesis

As noted above, the offering of Fox Factory has been a success. Shares were offered at the high end of the preliminary offering range. On top of that came opening day returns of almost 24%. At Friday's close, shares are trading some 32% above the midpoint of the preliminary offering range.

Fox Factory has established itself as a premium brand and has great customer royalty. The pace of innovation is really high as well, as it generates 70% of its revenues from products which have been developed over the past three years.

Yet there are some risks. This includes customer concentration, especially among OEMs, and a dependency on the general economic circumstances. Between 2008 and 2009 revenues actually fell as its suspensions are used in many discretionary products.

The business sees strong seasonality in its operations as well, with the second and third quarter being traditionally the strongest. Preliminary second quarter revenues rose by 15.8% to $70.3 million as net earnings increased by a third to $5.7 million.

At this pace, Fox Factory is on track to generate annual revenues of $275 million for the year, while net income could come in around $18 million. The valuation would come down to 2.4 times annual revenues and around 37 times annual earnings.

After the successful public offering, the valuation is a bit rich for me, especially on earnings multiples.

Source: Fox Factory - After The IPO, A Premium Valuation For This Premium Brand