February 13, 2015 / 4:48 PM / 2 years ago

As popularity of golf wanes, fund managers bet on cycling

5 Min Read

NEW YORK, Feb 13 (Reuters) - Forget tee time. These days, you're more likely to hear business deals discussed over the handlebars of a high-end bicycle than on the fairway, and fund managers are catching on.

As cycling becomes the hobby of choice among wealthy professionals, portfolio managers from firms such as Wasatch , Vanguard and Franklin Templeton have been moving into the shares of companies behind bicycle and bike-component brands such as Cannondale, Specialized, and Trek, whose highest-price models can cost more than $10,000.

Fund ownership of Taiwan-based Giant Manufacturing Co. Ltd , which produces its own Giant brand of bicycles and makes products for Trek and other high-end brands, leapt 10 percent last quarter, according to Morningstar data.

For Taiwan-based Merida Industry Co Ltd, which makes the Specialized line, fund ownership jumped 11 percent in the quarter, while for Dorel Industries Inc, the Canadian conglomerate behind Cannondale, it grew 6 percent.

"This is one of those trends that we're hoping to catch early on," said Jared Whatcott, an associate portfolio manager of the Wasatch International Opportunities Fund. Whatcott owns shares of Giant Manufacturing and Merida in his fund.

The trend is alluring to fund managers because of the changing demographics of cyclists. Roughly a third of riders have household incomes exceeding $100,000 a year, a rate 63 percent higher than 10 years ago, according to the National Sporting Goods Association.

Industry experts say much of that jump can be attributed to the waning popularity of golf, which still commands the highest portion of participants with household incomes above $100,000 among popular sports.

Indeed, the number of golf courses in the U.S. has declined for the past eight years, according to the National Golf Foundation. Lagging equipments sales prompted Dick's Sporting Goods Inc in July to fire all of the more than 500 PGA golf instructors that worked in its stores as consultants.

Among Whatcott's reasons for finding stocks like Giant and Merida appealing "is watching the sport expand and cyclists trading up to higher-end bikes that have higher margins," he said.

Gap in Share Prices

Several companies that produce the highest-end bikes or parts, such as Italy's Pinarello and Bianchi, are private, leading fund managers to gravitate toward the publicly traded alternatives. As a result, portfolio managers have been moving into companies that produce higher-end bikes even as their returns differ.

Giant, for example, has seen its shares jump 23 percent over the last six months, including a 7 percent gain since the start of January. Shares of Merida are up 14 percent over the same time, with much of the gain coming this year so far.

Yet, Canada's Dorel Industries has seen its shares fall 1 percent in the year to date, with a 13 percent jump over the last six months. Dorel gets two-fifths of its revenue from its cycling and leisure division, with a mix of premium brands from Cannondale and GT, as well as mass-market brands like Schwinn and Mongoose.

The surging U.S. dollar and decline in the euro - which accounts for about 30 percent of sales - prompted the company to say that currency costs are "expected to have a significant negative effect" on its earnings this year.

Dorel's price drop is prompting some fund managers to buy.

"Looking at it long term, the cycling division is one area that we think will continue to see material gains and margin improvements," said one fund manager who recently added shares of Dorel to his portfolio, but did not want to use his name because his trades were not yet public.

Danielle McCoy, an analyst at Wunderlich Securities, initiated coverage of the company with a buy rating. She has a price target of $52 Canadian dollars for the stock, 33 percent higher than its closing price Thursday of $39.08.

Part of the reason for her rating is that the company recently acquired a subsidiary of Hong Kong's Lerado Group Holdings Inc that makes products such as car seats and strollers. The purchase will help it expand margins by lowering supply costs.

Dorel is also focused on expanding its premium line of bicycles, which are already higher-margin, she said.

"We continue to view the acquisition of Lerado as a potential game changer," McCoy said.

Editing by Linda Stern and Bernadette Baum

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