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Nautilus: Extreme Value Opportunity

Patents and world-recognized brand where the value of the parts is higher than the current enterprise

July 12, 2019 | About:

Nautilus (NYSE:NLS), established in 1986, is a consumer fitness products company. Business activities involve designing, developing, sourcing and marketing cardio and strength equipment and accessories. It sells 88% of its equipment in the U.S., 5% in Canada and 7% internationally under recognized brands Nautilus®, Bowflex®, Octane Fitness®, Schwinn® and Universal®.

The direct business offers products to consumers via television, internet and catalogs. The retail store sells through a network of independent companies. Further, it realizes revenue from licensing brands and intellectual property.

Nautilus' long-term strategy is marketing to consumers and retail customers by leveraging existing brands, improving product lines by using engineering to reduce production costs, and continuing investment in research activities directed at acquiring or building new technologies. It also aims to increase international retail sales and maximize royalty revenues from licensing intellectual property.

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The product listing below is taken directly from the 10-K.

Nautilus® is a corporate umbrella brand and is also used to differentiate certain specialized cardio, treadmills, ellipticals and bike products.

Bowflex® brand represents a highly regarded line of fitness equipment comprised of both cardio and strength products, including the Max Trainer® , TreadClimber® , HVT® and LateralX® specialized cardio machines, PowerRod® and Revolution® home gyms and SelectTech® dumbbells.

Octane Fitness® brand is known for its innovation around low-impact cardio products, including the perfection of the traditional elliptical machine, along with the creation of new categories of exercise, including the xRide® recumbent elliptical, the LateralX® elliptical, and the Zero Runne®.

Schwinn® brand is known for its popular line of exercise bikes, including the Airdyne®, as well as Schwinn-branded treadmills and ellipticals.

Universal® brand, one of the oldest and most recognized names in the fitness industry, currently offers a line of weight benches.

Opportunities

The company's new CEO, appointed last week, is a tested digital innovator. His digital strength can prove critical to a significantly higher Nautilus valuation. New entrant Peloton, an exercise bike maker, grew into a $4.15 billion enterprise with streaming online subscription workouts after just five years. Peloton was valued at $4.15 billion after its latest funding round of $550 million in August 2018.

Peloton projects $700 million in revenue for the fiscal year ending in February versus $370 million the prior year. A potential Peloton initial public offering could arrive this year. But Peleton declined to comment on the IPO to CNBC. Peloton's IPO provides visibility for the extremely unsustainable valuation discount on Nautilus. Further, a digital platform is now offered on several Nautilus products.

The investment story is simple. The company has an extremely low historical and relative valuation. There is no investing advantage from including graphs or statistics on the industry's favorable trends for consumers, growing obesity, disposable income or forecasted potential competition. These add little or no value to the buying decision process. It's all about the price.

Deep valuation discount

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Risks

Alternative fitness choices may negatively impact future growth, for example, budget gyms such as Planet Fitness and new competitor Peleton.

The present financial position and flexibility materially decline after several negative quarters of falling revenue and margins. But even with the double-digit decline in year-over-year revenue comparisons, inventory rose significantly. Inventory to revenue is up 30% from 2015 to the trailing 12 months. Negative results are attributed to a failed marketing campaign. Management blamed the inventory issue on failed advertising, resulting in low awareness and insufficient communication of the platform's digital capabilities.

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Summary and catalyst

Nautilus has a mean-reverting valuation, is trading for a $28.30 million enterprise value with trailing 12-month revenue of $366.34 million, gross profit of $158.71 million and retained earnings of $174.50 million. The new CEO is leveraging his digital experience to offer subscription-based exercise programs. Subscriptions made a name for Peleton and its expected $4.1 billion IPO.

A Peleton IPO will favorably impact Nautilus' valuation. Nautilus has valuable patents and world-recognized brand names where the parts is greater than the current market value.

Disclosure: Author is long Nautilus. 

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