Leatt’s Growth Is Slowing Down And The Future Looks Grim – Seeking Alpha

Introduction

In October 2022, I wrote an article on SA about motorcycle safety gear company Leatt Corporation ( OTCQB: LEAT ) in which I said that it had no visible competitive advantage and that this seemed that the period of rapid growth could be coming to an end.

Well, revenues rose by just 5. 2% to $23. 3 million in Q3 2022 plus sales of the flagship neck brace product were sluggish. In addition, the main reason that revenue development stayed in positive territory was strong helmet sales. In my view, the arriving months could be challenging for Leatt from a financial standpoint and I’m keeping my neutral rating. Let’s review.

Overview of the recent developments

In case you haven’t read any of the previous articles about Leatt, here’s the short description from the business. The company has the exclusive global manufacturing, distribution, sale, and use rights for an injection molded neck protection system for off-road moto riders named the Leatt-Brace. The first patents with regard to this item were filed in 2003 and over 900, 000 of these neck braces have been sold worldwide to date. However , I think the Leatt-Brace has lost its shine over the past years as it accounted for just 8% associated with revenues in Q3 2022. The majority of Leatt’s sales currently come from body armor and helmet products under its own brand. The organization also offers knee braces, elbow guards, goggles, hydration bags and apparel items such as jerseys, pants, shorts in addition to jackets. Leatt’s products are made mainly within China through outsource manufacturing arrangements. According to the past several quarterly financial reports, the company is building manufacturing capacity Thailand and Bangladesh (see page 14 here ) but when construction will be finished is anyone’s guess at this point.

Leatt is among the particular main players in the global protective motorbike riding gear sector, but the market is fragmented and data from Technavio shows that will the vast majority of progress until 2026 will come through the Asia-Pacific region. This could be an issue for Leatt as Europe and North America account for about 80% of its sales.

Leatt’s revenue growth was almost flat regarding several many years before rising above 20% in 2017 and reaching almost 90% in 2021 and I think of which the most likely explanation is that the company was somehow getting market share at the expense of some of the competitors. Nevertheless , I think that this only product the fact that sets typically the company apart from its competition is this Leatt-Brace which seems to be out of favor with riders lately and even readers regarding my previous article commented that many customers consider the other products cheap and often the quality in order to be inferior to competitors. In light of this, We find it unsurprising that revenue growth offers slowed dramatically in the last two quarters. Looking at your Q3 monetary results, we can see that income rose by simply 5. 2% year upon year and the main reason growth has been positive was strong motorcycle and mountain bike helmets and off-road motorcycle boots sales. Inside addition, there was a 51% increase in the product sales volume of technical apparel designed for rough-road motorcycle together with mountain biking use which usually boosted the exact revenues of the other products, parts and accessories segment. Leatt-Brace sales slumped by over 30% and additionally there were comments below my earlier article regarding Leatt that riders think about this product to be old tech.

The business said in its Q3 financial report that there was exceptional global demand for their redesigned headgear line-up intended for off-road motorcycle use. However, it mentioned during it is Q3 earnings call that will while there is strong demand for high-end bikes, stock levels to get lower-end bikes were very high and there was clearly less need. In our view, this raises concerns about protective motorbike riding gear revenue over the approaching months.

Searching at the valuation, Leatt’s TTM P/E ratio stands at 7. 65x as of the time of writing as well as the organization said during its Q3 earnings call that margins are likely to improve in the near future thanks to softening shipping rates. However, I am concerned the P/B ratio stands in 2. 8x at the particular moment. Looking at the balance sheet, Leatt has an asset-light business model, not to mention the tangible book value was simply $39. 8 million since September 2022.

Overall, typically the Q3 2022 results involving Leatt had been decent as its net income came inside at $4. 1 million but Now i’m concerned of which the income growth is almost gone. In addition , 2023 is likely to be challenging for the entire consumer cyclical sector as several major economies can face a prolonged recession. I actually still don’t see a new significant moat here and there aren’t any main catalysts pertaining to the share price on the horizon. In inclusion, Leatt is listed on the OTC and the trading volume rarely exceeds 5, 000 shares and i believe the fact that it might be best meant for risk-averse investors to avoid this particular stock.

Investor takeaway

In my view, Leatt has a compelling level of profitability, but it seems that revenue growth is evaporating, as well as the coming months may be underwhelming from some sort of financial stage of see. Taking a look at this long term, the situation doesn’t look much better because sales of its Leatt-Brace have been shrinking and most of often the growth found in the worldwide protective motor cycle riding gear is expected to come coming from the Asia Pacific region. Overall, Leatt seems like a good relatively inexpensive value stock based on the PRICE TO EARNINGS ratio, but the trading volume is low and your outlook designed for the expansion of it has the business seems grim from the moment. I think that will risk-averse traders should avoid this share.

Editor’s Note: This article discusses one or more securities that do not trade about a major U. S. exchange. Please be aware connected with the risks associated with these types of stocks.