Fox Factory’s plans to acquire Marucci Sports, the maker of baseball bats and gloves, for $572.0 million has drawn skepticism from Wall Street analysts concerned about the timing given the company’s struggles and how the acquisition fits alongside its core suspension components businesses.

Marucci’s brands include Marucci, Victus, Baum, and Lizard Skins. Kurt Ainsworth, a former professional pitcher, co-founded Marucci Sports in 2009. He both runs the business and is CEO.

Shares of Fox Factory tumbled $22.60, or 27.2 percent, to $60.53 last Friday after Fox reported third-quarter results that came in below guidance, slashed its guidance for the year, and reported the Marucci purchase.

The missed guidance and outlook reduction were attributed to the impact of the United Auto Workers strike and continued inventory destocking in bike channels.

Sales in the quarter were $331.1 million compared to guidance in the range of $390 million to $410 million. Adjusted EPS was $1.05, at the low end of guidance in the range of $1.00 to $1.20. For the year, sales are now expected at the low end of $1.43 billion to $1.47 billion, down from prior guidance between $1.67 billion to $1.7 billion, and adjusted EPS is now projected at the low end of the range of $4.20 to $4.45, down from the low end of the range of $5.00 to $5.30 previously.

The stock’s hit was attributed to deteriorating conditions in Fox Factory’s core business of manufacturing and selling suspension systems; however, most analysts largely saw the acquisition of Marucci, its largest acquisition in the company’s history, only creating more uncertainty around the stock.

The concerns came despite Marucci’s impressive growth under Compass Diversified (CODI), a publicly-held investment firm. CODI purchased the business in 2020 for $200 million and invested approximately $70 million in the add-on acquisitions of Lizard Skins and Baum Bats to Marucci’s portfolio.

In 2022, Marucci generated $165 million in sales and $36.8 million in adjusted EBITDA. Sales grew sales 40 percent year-over-year in 2022, with trailing 9-month sales growth as of September of 18 percent. Marucci also reported trailing a 9-month EBITDA margin of 28 percent versus Fox Factory’s EBITDA margin at 20 percent.

Fox expects Marucci will be accretive to revenue and earnings, given its strong growth and EBITDA margins of 25 percent. The transaction, scheduled to close this month, is expected to lead to leverage of about 2.1 times after closing. Fox said the transaction value aligned with recent deals, with analysts estimating it equated to about 10 to 12 times trailing EBITDA.

Among analysts covering Fox, Larry Solow at CJS Securities said Marucci has a dominant share among elite baseball players, impressive margins and strong growth, but was concerned about the fit alongside Fox’s other businesses. Solow said, “Marcucci is a strong stand-alone asset with significant further growth potential. However, on the surface, the acquisition makes little sense and drives questions about FOXF’s future focus with little similarities between suspension and automobile upfitting with baseball and bats.”

Jim Duffy, an analyst at Stifel, said, “Marucci complicates the equity story, distracts focus and capital allocation from what we see as compelling global growth opportunities in automotive, and limits balance sheet flexibility.”

Duffy noted that while Marucci’s pro-forma earnings are expected to be slightly EPS accretive to Fox’s FY24 profits, “we see it multiple dilutive and perhaps dilutive to growth over time.” He noted that while Marucci is seen as a premium brand in the category, baseball and softball participation “is more mature in the core North America market weighting growth dependence to share gain and international.”

Anna Glaessgen, an analyst at B. Riley Securities, said, “We find the acquisition of Marucci a surprising offshoot; while we understand whitespace opportunities, relatively high margins, etc., we’re cautious on a new brand that doesn’t seemingly benefit from FOXF’s legacy core competency, superior innovation in ride dynamics.”

Glaessgen noted that Fox’s management said Marucci had a similar strategy as Fox’s core business of focusing on pro-athlete-focused products that “garner wider appeal and highlight clear whitespace opportunities,” such as incremental leagues/markets, as well as relatively high margins. However, she sees risks in the combination. Glaessgen said, “While we acknowledge FOXF’s strong historical M&A track record, we lean toward cautious on this deal, as historically, we’ve viewed superior ride dynamics as core to the FOXF story.

“We look forward to incremental color on the go-forward expectations for this business,” she continued.

Michael Swartz at Trust Securities estimated that based on Fox’s management estimates, the price paid and the balance sheet impact, Marucci could add 10-to-20 cents in EPS in the first 12 months, excluding any realized synergies from combining back-office functions as well as sourcing or supply chain efficiencies gained. However, he believes investors will have “questions around the fit/strategic rationale of the Marucci acquisition.”

The most optimistic was BofA Securities’ Alexander Perry, the only analyst with a “Buy” rating on Fox, who said Marucci’s growth “seems impressive” while noting that social interest in Marucci remains high as Google search volume more than doubled versus last year in October.

In announcing the deal on the conference call, Fox’s CEO Mike Dennison said Marucci’s addition marks a continuation of Fox’s diversification strategy, expanding its business away from selling through OEMs (original equipment manufacturers) into the aftermarket space.

“Marucci checks all the boxes as we combine two leading brands that are disrupting their respective industries through innovation and technology,” said Dennison. “Building on the tradition of winning and creating the best-performing products for the most demanding athletes, Marucci is unmatched as its halo brands, Marucci and Victus wood bats, drive more than 56 percent market share with Major League baseball Pros.”

He noted that Marucci had followed a similar “one plus one equals three” formula as Fox in acquiring Lizard Skins and Baum Bats, which “are creating exponential growth vectors” within the business. Lizard Skins, a manufacturer of grip tape used in baseball, cycling, hockey, and lacrosse, was acquired in October 2021, while Baum Bats, specializing in composite wood bats, was added in April 2023.

“We see a significant TAM (total addressable market) opportunity for Marucci and potential to unlock new growth vectors expanding far beyond diamond sports,” said Dennison. “Not only do we expect Marucci to be accretive to Fox’s growth and EBITDA margin, but we are also excited about the synergy potential in metallurgy, manufacturing and supply chain.”

Finally, Dennison touted the cultural fit. He said, “While there is so much to be excited about with this deal, what inspires me the most is the similarities in our cultures. Having spent considerable time with the Marucci team, its authenticity is undeniable and is founded by and led by a collective group of former elite athletes and coaches. Walking the hallways and meeting employees, I honestly felt like I was in a Fox Factory where winning is everything and challenging impossible happens every day.”

Asked about the fit alongside Fox’s other businesses in the Q&A session, Dennison said Fox had been “looking for the right brand, the right product in specialty sports for a long time” and found “a bunch of really great things” in Marucci.

He noted Marucci offers a “highly engineered product” with a “top-down” approach of focusing on delivering innovation for elite athletes and then scaling those efforts down to Little Leaguers, similar to Fox’s strategy. They also have a similar emphasis on aluminum and composite materials. The CEO said, “Obviously, that’s what we do for a living in aluminum and composite materials. So, the synergies that we can create in design engineering and manufacturing are pretty significant on a long-term basis.”

Dennison called out the “passion” of Marucci’s leadership team, with most being former MLB players who have worked as scouts or been prominent college or softball players. Dennison said, “It’s literally Fox with a different name.”

Dennison concluded, “So when you think about the product, you think about the engineering, you think about the pro-athlete first down to weekend warriors or, in this case, the Little Leaguer. And then you think about the culture. And then you think about the financials, which are accretive both from an EBITDA perspective and from a revenue perspective. You look at it, and you go, ‘You know what? This checks all the boxes.’ This is the best thing we have seen for specialty sports since I’ve been the CEO, and we were just thrilled to add them. So, this is a great day for us.”

Photo courtesy Marucci