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4/25/2022

Nautilus: Priced below Liquidation

Description:

Nautilus (NLS) is a fitness solutions company. It designs and markets cardio and strength fitness products. Treadmills, ellipticals, stationary bikes, and weightlifting equipment sell under the Nautilus Bowflex, Schwinn, and Universal brands. And, offers a fitness digital platform, JRNY. My interest in buying NLS is quantitative. I won't speculate on the supply chain, inflation, competition, or online strategy. Or how Peloton's (PTON) race to the bottom on price affects NLS near-term stock returns.


Valuation:

The market is pricing Nautilus for distress/bankruptcy at $3.02 or a market cap of 98.432 million. But NLS has a margin of safety with their valuable brand names in Nautilus, Schwinn, and Universal. Further, per-share values of 4.09 for inventory, 3.25 for receivables, 5.64 retained earnings, gross profit 6.61, revenue 21.17, and equity of 5.78. The NCAV is 2.38. And asymmetric returns if the online strategy proves mildly successful. The 52-week price change is -82%, a three-year return of -41%, and no change in the shares outstanding from 12/2015 to MRQ.

Trailing tangible book value for the TTM per share is 4.70. An increase  152.19% versus the average value of 1.86 from 2015 to 12/2020. Per-share gross profit, revenue, and EBIT values increased 2.79%,64.13%, and 60.34%, respectively, versus the average values from 12/2015 to 12/2020. The stock price change over the same period declined by -76.65%!

Valuation ratios highlight the extremely oversold situation. For example, P/TB is 90.78% lower at .67 versus the average value of 7.27 from 12/2015 to 12/2020. Likewise, P/S is 85.17% lower at .15 versus the average value of 1.01 from 12/2015 to 12/2020.

The table below shows Nautilus' current discounted valuation metrics versus historical results. Comments on trailing ten years.








The table below shows the disconnect between value creation versus price declines and additional comparisons to Peloton and NAISC (339920) Sporting and Athletic Goods Manufacturing. 


Book value and retained earnings per share changes versus the price over the same period show value creation versus stock price decline. Also extreme are the price to sales, price to book, and enterprise value to gross profit relative to PTON and NAISC 339920. 


























Risks:

Nautilus sells commodity products with growing competition. Equally important, management is pursuing a costly money-losing online strategy. The strategy has a high probability of falling short. March 2021, Nautilus acquired motion technology VAY to expand its uncertain profitable JRNY digital platform.

Management forecasts negative operation results until 2023. Further, the growing inventory balance may indicate deeper problems. Additionally, input cost inflation with steel, memory chip shortages, and the supply chain weighs on their future. Nautilus uses Chinese contract manufacturers and will face the uncertain impact of shutdowns and geopolitical risk. The larger Peloton is going all-in on their turnaround, coupled with Nautilus struggling to create an online presence with an inferior quality brand reputation to Peloton.


Conclusion:

Nautilus is  balance sheet cheap with a market price below liquidation value. Current assets, brands (Nautilus, Bowflex, Schwinn, Universal) and leadership in strength training contribute to its estimated price below liquidation value. Further, the per-share increase in book value and retained earnings don't reconcile with the stocks dramatic price decline. Additionally, if management executes, the stock price will see asymmetric gains assisted by the 10.5% of the float that is short.

Activism and a company sale is possible.   C suite is motivated by generous RSU and PSU compensation. "As of December 31, 2020, unrecognized compensation expense for outstanding but unvested stock-based awards was $7.2 million, which is expected to be recognized over a weighted-average period of 0.3 to 1.8 years". The equity incentive has increased since the 10K on 12/2020.

I recommend buying NLS for SPECULATIVE investors at current prices.

                                                            
Long NLS