One of the more visible side-effects of the COVID-19 pandemic has been a dramatic increase in the number of cyclists on the road. Some of the new riders have taken up the sport as a recreational activity to replace the gym or team sports that have been shut down. Others have decided the risk of a traffic incident is less than the risk associated with public transit and have bought a bicycle to commute to work or local shopping. Whatever the reason, the surge in demand for bicycles and related services is huge: In my neighbourhood, customers line up outside bike shops as they once did for night clubs in the entertainment district and the local Canadian Tire store display racks are empty.
This is not a purely Canadian phenomenon, of course. A recent article in the Financial Times carried the headline Brakes On: Bike Shortage Halts Global Cycling Revolution. Reporters in London, Paris and Beijing all had anecdotes about the way in which demand for bikes has simply overwhelmed supply. Bottlenecks at the manufacturers in China and Taiwan, supply chain logistics delays and a shortage of qualified mechanics were all contributing to a shortfall at the retail level.
When demand exceeds supply, smart investors start looking for the beneficiaries of this situation, and with a global market approaching $50-billion, the bicycle industry should offer some tempting opportunities.
By chance, I have been down this road almost nine years ago. In August, 2011, I wrote an article for Report on Business titled Cycling Is The New Golf, But Who Are The Winners? Back then, the growth driver was not a mass transportation market, but aspiring executives who wanted to spend quality time with the boss who no longer played golf but rode a high-end carbon fibre bike. This was, and still is, a niche market as the price point starts at $10,000 and goes up from there. Most of the manufacturers are small and the product is distributed through independent bike dealers, so there were no obvious winners. As a conclusion, I suggested: “For the best return on your investment, I recommend that you buy a bike and ride around the block. Your heart will thank you for it.”
Not much has changed. Back then, the only Canadian exposure to bicycle distribution was through Montreal-based Dorel Industries Inc. (DII.B). Only one-third of revenues come from Dorel Sports, which sells high-end bikes such as Cannondale and GT and mass market product under the Schwinn and Mongoose brands. The remaining two-thirds is equally divided between the Juvenile division, which sells child car seats, strollers and playpens, and the Home division, which sells ready-to-assemble furniture and mattresses. The company has global operations, including a Brazilian bicycle subsidiary facing currency and pandemic issues and the balance sheet has become quite leveraged recently. Although Dorel trades at half book value, it is difficult to generate enthusiasm for a stock with a modest bicycle exposure that can be overwhelmed by other issues, so I will pass.
Shimano Inc. (7309-Tokyo) in contrast, has an 80-per-cent exposure to the bicycle component industry – gears and braking systems – so it sells to a wide range of bicycle manufacturers. The remainder of revenues come from fishing tackle and rowing equipment. The balance sheet is very conservative with negligible debt and so the return on equity is a modest 13 per cent recently. This places the recent stock price of 21,160 yen ($268.29) at a price-to-book value of more than four times and a price-to-earnings multiple of 32 times latest earnings. The stock is up 20 per cent year-to-date, so it is not exactly undiscovered.
Shimano American depositary receipts (ADRs) trade under the symbol SMNNY, so it is possible to buy the stock if you have a U.S. currency brokerage account.
Moving up the value chain, if you have access to the Taiwan stock exchange, you might consider Giant Manufacturing Co. (9921-Taiwan). This is the world’s largest bicycle manufacturer, which produces under its own name and also for many private labels. Once again, this is not an inexpensive entry point: At a recent price of 317 new Taiwan dollars ($14.61), the stock is up 50 per cent year-to-date and trades at 5.4 times book value and a P/E ratio of 36 times.
Finally, if your taste extends to microcap stocks, you could research Tandem Group PLC (TND-London). This niche company located just outside Birmingham produces several iconic names that will resonate with ancient British expats such as myself (Falcon, Claud Butler, Holdsworth), but it is far from a mass market player. No one buys one of these bikes to ride to work. With a market cap of a little over $20-million and daily trading value of $45,000, it maybe deserves to trade at a P/E multiple of less than seven, and below book value.
The world has changed dramatically in the past nine years, but after updating the research, my advice remains unchanged: For the best return on your investment, buy a bike and ride around the block.
Robert Tattersall, CFA, is co-founder of the Saxon family of mutual funds and the retired chief investment officer of Mackenzie Investments.
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