The first issue of Nordic Gems will be fully dedicated to a Swedish company called Mips AB (Ticker: $MIPS/$MIPS.ST - trading on Nasdaq Stockholm). This issue became a little more detailed than planned since the research was so much fun, but I’ve tried to trim the fat as much as possible. Enjoy!
>50% EBIT, 40% FCF and >50% RoIC
70% Topline CAGR (2014-2020)
Single-digit market penetration
<$3B Market Cap
The beginning of this story takes place back in the early 1990’s in an operating room, where Hans von Holst’s, neurosurgeon and professor emeritus, is standing over a patient’s open skull. Back then, Hans dealt with a lot of head trauma patients who shared a similar injury, of which the exact cause was hard to pinpoint. The symptoms though, was torn off, unrepairable, nerve fibers in the brain, which in the worst case scenario left his patients disabled.
How could this be, since most of his patients actually wore helmets during the accidents? Even without visible damage to the skull, where it seemed like the helmet took most of the blow, the brain could still be badly injured. Hans couldn’t really find anything useful in his textbooks on the subject either.. So he started laying out the puzzle himself; which patients had it the worst, what happened to them, and what during the accidents/fights might have caused the nerve fibers to finally snap?
A couple of years later, in 1996, he finally had it figured out. It was violent rotations of the brain caused by angled impacts (illustrated in the picture below, which apparently is ~70% of all head injuries). Hans wanted to solve this problem once and for all, and decided to hire the young Peter Halldin (Chief Science Officer at Mips today), a researcher at the Swedish Royal Institute of Technology, to help him get cracking on this.
So, now we are somewhere in the early 2000’s, and Hans, with his medical knowledge about the problem, together with Peter are about to start testing their helmet prototypes in simulations. They realized pretty quickly in the technological process that the best way to do this, was to mimic the brain’s own protective layer; the cerebrospinal fluid, which actually protects the brain from rotating brain motions just like the now patented Mips BPS technology, but of course this fluid can only protect us to some extent.
The product therefore became a low-friction layer called Multi-directional Impact Protection System BPS (Brain Protection System), that can move freely inside a helmet to absorb tough angled impacts. The first impact simulation test on the prototype was done in 2000-2001, and it showed that 40% of the damages to the brain was reduced thanks to the BPS layer. Usually, depending on the speed, it only takes 5-10 milliseconds between the outside plastic surface of the helmet hits the pavement until BPS starts doing it’s magic. So you could say, that’s basically how long it takes for you to get somewhat disabled and/or unwanted changes in your personality.
The first commercial helmet with BPS implemented was actually launched in 2007, and it was a riding helmet. Back in these days, the initial plan was to manufacture and sell the whole shebang, although, they soon realized that creating technology was one thing - create a consumer product was another. The riding helmet they released was of very low quality, it couldn’t handle the UV exposure and soon started to crack. The Mips layer on the other hand worked perfectly well, therefore the Ingredient Brand idea started to form..
In a fairly recent interview (December of last year, unfortunately in Swedish), the now CEO Max Strandwitz actually said, without elaborating too much on it, that the company did go bankrupt once back in the day. I’m guessing it happened somewhere around the crackling ride helmet incidents… But then, finally, in 2008, the focus started to shift. The yellow Mips logo you now see on >700 helmet models (FY2020) from >140 brands (Q2 2021) took it’s shape.
The first institutional investors and the first customer (the Swedish cycling and ski helmet manufacturer POC) jumped onboard almost at the same time, and since 2008-2009 almost every KPI has exploded. In 2012, the awareness of rotational head injuries swept through the United States like a tidal wave, after the magazine Popular Science published a piece called “The Helmet That Might Save Football”, where they even mentioned the Mips BPS technology.
20 years after the initial 1996 research started and 3 million sold helmets with BPS technology later, Mips decided to go public in 2017. The two main reasons seemed to be 1) the largest shareholder, a sold-off subsidiary of BRG Sports (one of the largest helmet brand owners globally by the time of their investment), wanted to cash out, and 2) to build more brand awareness and legitimacy. So, in late March of 2017, the company started trading on Nasdaq Stockholm. An initial 20% pop gave Mips a valuation of 1.4B SEK (~$150M).
I’m sure it was a long-term good thing for the Mips brand that BTA (the BRG subsidiary mentioned above) eventually sold their stake; the ability to stand on its own two feet, working impartially with the industry, not being owned by a helmet manufacturer, seems in my mind like a much better position for a brand like Mips when approaching new potential partners.
And since that initial 20% IPO pop back in 2017, despite a trailing revenue multiple around ~8x, the stock has gained a whopping ~1730%, or 18x. This means that the Enterprise Value now equals ~$2.8B. This obviously needs an explanation.. And to Mr Market’s defense, topline and net earnings on a per share basis have grown >5x and almost 13x respectively during the same period. Among the most impressive stuff I’ve ever seen to be honest.
Genius Business Model
But how is this possible, doesn’t Mips manufacture and sell some kind of hardware plastic thingies?! Well, both yes and no. This is where the Mips brilliance comes in. Obviously they have to sell these plastic BPS systems, but the main thing they sell is a license structure, which includes permission to:
Use a specific BPS version for a specific helmet model.
Attach the BPS components, exclusively bought from Mips.
Use the Mips brand and other IP (symbols, slogans, etc).
Distribute and market the helmets as a Mips BPS product.
So, the customers (i.e. the helmet manufacturers like for example Fox Racing for motocross, ABUS for every type of bicycling imaginable, Head for snow sports or Guardio who makes a new generation of construction helmets) essentially pay to market the Mips BPS technology. They pay to get the yellow sign of approval (the signature yellow dot, seen below, which actually is a requirement that it has to be visible on every helmet) that their helmet is much safer than the competitors, which consumers now ask specifically for.
This very much resembles what Gore-Tex has done extremely well in textiles since the 1980’s. They got their patents, they partnered with wonderful brands around the world and got paid for gaining consumer mindshare. Gore-Tex’ patents have now expired a long time ago, but consumers don’t know and/or don’t care, which means Gore-Tex’ customers don’t care either. People know that it just works, and that is has always worked. It’s a trust thing.
Mips had 47 granted and 31 pending patents at the time of their IPO, and has been in court defending BPS around 3-4 times that I’m aware of. In the 2020 Annual Report, they mention having >200 granted patents and 125 pending. I’m no patent expert, but it sure sounds like they work a lot on this portfolio. Their biggest edge though, according to CEO Max Strandwitz, is the vast data library of crash simulations and all the man hours behind 20 years of research.
Other famous ingredient brands are DuPont’s Teflon, Intel (Intel Inside), 3M and one of the most successful Swedish companies of all time; Tetra Pak (not publicly traded unfortunately, but I’m sure I’ll write about them in the future anyway), currently the largest food packaging company in the world. What’s important for a brand like Mips, that still relies on their technology and active patents, is that they work heavily on the transit from patent market leader to consumer expected brand market leader - like Gore-Tex.
In my opinion it looks like they have come a long way on this journey, but the penetration of what they call “Focus Market” is actually still single digits.
After the initial lower margin “heavy lifting” when onboarding a new brand and/or model (fitting the BPS system into a specific helmet, safety testing it and then mass producing the BPS system layers) is paid for, basically every incremental licensing dollar for producing and selling the helmets drop straight to the bottom line. EBIT margins have as a result of this expanded from ~6% in 2015 (the break-even year) to >50% LTM (see below).
C level, Sales and R&D personnel (patents/research, BPS fitting into existing helmets, helping brands create new helmet models with BPS integrated and so on) are based in Sweden, and then they have a subsidiary in China who manufactures the BPS systems. Why in China? Well, obviously because it’s cheap, but mostly because a lot of their brand partners manufacture helmets there. The close local relationship with the factories are important.
So, you could argue that Mips to some extent does what rating agencies like Moody’s and S&P Global do; they issue a “seal of approval” and then collect a fat licensing fee when it is used and promoted, but with a hardware and R&D component added into the mix upfront. It’s really a fascinating way of doing business. Because of this scalable model, the EPS has grown almost 13x since 2016 like I mentioned before, and keep in mind that is from a year where they already had >20% EBIT margins. This is almost unbelievable, I agree.
Single Digit Penetration
So, how large can Mips become, and what’s priced in? Well obviously the first question is very hard to answer. In the 2020 Annual Report, which is the only time they present these types of special KPI’s, Mips reported a 6% penetration of what they call their Focus Market (the lowest hanging fruit). This number equals roughly 1/3 of their Total TAM, so they have plenty of room to run however you frame the addressable market (which is growing in itself, too).
Their two financial targets are 1bSEK in revenue with >40% EBIT margin by 2025, with 1/2 of net earnings distributed to shareholders as a dividend. Yes, they apparently already generate more cash than they can put to good use… Looking at the latest quarter, with 139% organic revenue growth y/y and a margin of >50%, I think it’s safe to say they will beat these long-term targets. If we adjust a little for seasonality, the LTM revenue is 468mSEK, up 78% y/y, with a 51.7% margin. Analysts seem to think 680mSEK is enough for 2022E, but I think ~20% growth next year seems a little too pessimistic…
Mips produced and delivered 7.2M (+44% y/y) BPS systems last year, for a total of 729 (+25%) different helmet models. These KPI’s are astonishing.
In a podcast interview late last year, Mips’ CEO talked a little about the transition phase when adding new brands/models. He explained that it takes time to fully penetrate the existing customer base, since they usually have a lot of helmets out for sale when they initiate the R&D phase with Mips. It’s a bit of the innovator’s dilemma (a term popularized by Clayton Christensen, who wrote book by the same name), where they don’t want to “disrupt themselves” by offering a much better product that cannibalizes on their existing stock. This is obviously not very rational, but.. what else is new?
In terms of multiples, Mips is definitely not a bargain. Quite the opposite, if you can’t get very comfortable with the growth runway and patent advantage. The NTM earnings multiples look something like 75x EV/EBIT and 100x FCF, which implies a 35-40x EV/S multiple. But I mean, there’s probably still some percentage points left on the margin expansion, and without material damage to their brand reputation and/or industry position, they can without a doubt 5x their revenue one more time in the not too distant future. Earnings and dividends will most likely grow even faster in this scenario.
Mips is without a doubt one of the most exciting companies in the Nordic region right now - personally though, I can’t get enough margin of safety at 900-1000 SEK and wish I started studying this company a long time ago (as with a lot of businesses..). But I definitely see a fantastic story playing out in the coming years though, and will try to follow the name from the sidelines in the hopes of a better entry. If I didn’t run a concentrated investing approach with ~10 ideas, I might put it on as a 1-2% position and just let it rip.
Although.. If Mips actually turn out to be the “Brain Safety Gore-Tex” of the global helmet industry, <$3B is probably a friggin steal.