Nautilus: Priced Below Liquidation

The market is pricing Nautilus for distress or bankruptcy

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Apr 26, 2022
Summary
  • 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
  • The per-share book value and retained earning increase don't reconcile with the dramatic price decline.
  • Additionally, if management executes its strategy well, the stock price could see asymmetric gains.
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Nautilus (

NLS, Financial) is a fitness solutions company that designs and markets cardio and strength fitness products. Treadmills, ellipticals, stationary bikes and weightlifting equipment are all sold under the Nautilus Bowflex, Schwinn and Universal brands. The company also offers a fitness digital platform, called JRNY.

My interest in Nautilus is quantitative. I won't speculate on the supply chain, inflation, competition, or online strategy, or how Peloton's (

PTON, Financial) race to the bottom on price could affect Nautilus' near-term stock returns.

Valuation

The market is pricing Nautilus for distress or bankruptcy at $3.02 per share for a market cap of 98.432 million. However, Nautilus has a competitive advantage with their valuable brand names.

Further, per-share values for the most recently reported quarter came in at $4.09 for inventory, $3.25 for receivables, $5.64 for retained earnings, $6.61 in gross profit, $21.17 in revenue and $5.78 in equity. The net current asset value is $2.38.

I believe this stock could provide asymmetric return potential if the online strategy proves even mildly successful. The price is down 82% over the past 52 weeks, with a three-year decline of 41% and no change in the shares outstanding.

Trailing 12-month tangible book value is $4.70, which is an increase of 152.19% versus the average value of $1.86 from 2015 to 2020. Per-share gross profit, revenue and Ebit values increased 2.79%, 64.13% and 60.34%, respectively, versus the average values from 2015 to 2020. Nevertheless, the stock price change over the same period was a decline of 76.65%!

Valuation ratios compared to the company's history highlight the extremely oversold situation. For example, the price-to-tangible-book-ratio is 90.78% lower at 0.67 versus the average value of 7.27 from 2015 to 2020. Likewise, the price-sales ratio is 85.17% lower at 0.15 versus the average value of 1.01 from 2015 to 2020.

The table below shows Nautilus' current discounted valuation metrics versus historical results, with comments on the trailing 10 years.

1518960803158499328.jpeg

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

Book value and retained earnings per share changes versus the price period show value creation versus stock price decline. Also extreme are the price-sales ratios, price-book ratios and enterprise value to gross profit relative to Peloton and the NAICS 339920 industry.

1518960808904695808.jpeg

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. In March 2021, Nautilus acquired motion technology VAY to expand its uncertain 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 thus face the uncertain impact of Covid-related 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 stock's dramatic price decline. Additionally, if management executes its strategy well, the stock price could see asymmetric return potential assisted by the 10.5% of the float that is short.

Shareholder activism or a company sale are also possible. The 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," according to the company. The equity incentive has increased since the 10,000 as of the end of 2020.

I am thus bullish on Nautilus at current prices, though I believe it is still a speculative investment.

Disclosures

I am/we currently own positions in the stocks mentioned, and have NO plans to sell some or all of the positions in the stocks mentioned over the next 72 hours. Click for the complete disclosure
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