Updated: Jul 12, 2022
Analysis: Nautilus, Inc.
Valuation Format Used
Valuation Breakdown & Value
Cause for Concern
Bonus Stats to Know
The analysis brought forward will share why I strongly believe that Nautilus; Ticker: $NLS, is currently undervalued. I am confident it has a grand probability of bringing in a high return on investment (ROI). Below, I will break down the numbers to back up my thesis. Keep in mind that when using this approach to value the stock it may become subjective to an extent. So, this is all my personal opinion and probable outcome. The method I will use to give this stock a present value falls under the umbrella of a salvage and liquidation approach. I will mainly focus on its Net-Current-Asset-Value (NCAV) and its Net-Net-Working Capital (NNWC). Although the company has had a history of having positive earnings, at the moment it is negative. There are also a few other reasons why I will not be valuing this particular company based on an EPS Multiple or Discounted-Cash-Flow model (DCF).
Data Nautilus, Inc: Company: Nautilus, Inc Sector: Consumer Cyclical Industry: Travel & Leisure Ticker: NLS Current Market Cap: $53.5 Million Price When Writing Publication: $1.70 Type: Undervalued/ Salvage/ Liquidation Approach High Target: $3.84 ROI: +125.88% Liquidation Risk: $0.79 Market Risk: $0.55 Note: By Market risk I mean stock wise, not value/adjusted liquidation wise. The stock is not the company, and the company is not the stock. The stock can indeed go much lower outside valuation risk.
What Is Nautilus: Nautilus, Inc., a fitness solutions company, designs, develops, sources, and markets cardio and strength fitness products, and related accessories for consumer and commercial use in the United States, Canada, and internationally. The company operates in two segments, Direct and Retail. It offers specialized cardio products, treadmills, ellipticals, bike products, home gyms, dumbbells, barbells, and kettlebells primarily under the Nautilus, Bowflex, Octane Fitness, Schwinn, and Universal brands, as well as a fitness digital platform under the JRNY brand. In addition, it engages in licensing its brands and intellectual properties. The company offers its products directly to consumers through television advertising, social media, websites, and catalogs; and through a network of retail companies consisting of sporting goods stores, Internet retailers, and large-format and warehouse stores, as well as specialty retailers and independent bike dealers. Nautilus, Inc. was founded in 1986 and is headquartered in Vancouver, Washington.
“North Star” Roadmap/ 5 Strategic Pillars
Nautilus’ team highlighted the five key strategic pillars of North Star expected to drive its path to digital transformation:
Adopt A Consumer First Mindset - Consumers lead customers' progress
Scale A Differentiated Digital Offering - Advancing connecting experience in JRNY
Value and ability as operators
Evolve Supply Chain To Be A Strategic Advantage - Supply chain improvement
Build Organizational Capabilities To Win - New capability and talent
In 2021, Nautilus provided targets under its five-year plan through fiscal 2026.
The plan calls for $1 billion in total revenue by 2026. The growth is expected to be driven by an incremental $177 million to $196 million of fitness equipment sales, expanding at a 5 percent to 6 percent CAGR. Approximately $200 million in revenue is expected to come from JRNY digital subscriptions, with the subscriber base expected to expand from a targeted 250,000 subscribers in fiscal 2022 to 2 million by fiscal 2026. At least 20 percent of total revenue is expected to come from digital subscriptions in 2026.
Nautilus is targeting “at least” 10 percent annual operating margins with the benefit of a “more reliable” revenue stream.
CEO, Barr Jim said,
“Today, we are not a one product-driven company but a much more diversified revenue platform with a rapidly growing digital component enabling all consumers to rely on Nautilus for their entire fitness journey. We operate in a very dynamic industry with a profoundly expanded opportunity that includes changing consumer habits, technology preferences, and connectedness, providing us a way to help our consumers on all aspects of their journey. The North Star strategy will ensure the “new” Nautilus will properly leverage our leading brands, products, innovation, distribution and digital assets to build a healthier world, one person at a time.”
Before we dive into the numbers, I would like to share that this equity will be very volatile. One main reason is that it is a smaller market cap stock. Another one is the fact that we are facing this economical downturn and confronting this bear market. Any recession will delay the time it could take to reach its reasonable value. Markets crashing further would only drag the stock much lower. As fear rises, most won't feel comfortable holding an asset like this during bad times. Especially, because of the type of goods and services it offers. I would not be surprised if this asset dropped to as little as ~$0.55 per share. This estimate is partially due to its behavior back in 2008-09. Of course, that would only make it much more valuable and attractive, those levels would not concern me one bit. If anything, I would be very excited about the opportunity and worried about what I can do to buy more. That being said, there are two phrases I always use. Number one, keep it simple. Number Two, buy when the value is there and sell when it is not. In other words, you don't want to overcomplicate things or you'll get complicated results. There is no need to time the market and do too much. Finally, the company is excepted to be reporting negative Earnings-per-share (EPS). Although, I have plenty of reasons to believe this will certainly not matter. In fact, it’s more of an advantage, more on that later
What is NCAV
NCAV or, Net-Current-Asset-Value is a way to give a company an underline appraisal focused solely on its current assets minus its total liabilities. What this does is help us determine what a company has left after paying back all its debt and liabilities but only using its most liquid assets. This is preferably called Current Assets, a current asset is an asset that can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within the current fiscal year, operating cycle, or financial year. Once we acquire the NCAV we are able to further discount those line items to give it a reasonable “worst-case” scenario. That new result is best described as Net-Net-Working-Capital or, NNWC for short. What is NNWC
NNWC as mentioned above stands for Net-Net-Working-capital. The overall application has a very similar structure as NCAV only now you discount those Current Assets before you go on with the formula as a way to look at a deep “Worst-Case-Scenerio”. It helps further discount the stock on hand to achieve a harsher valuation thus, lowering your risk. In simple terms, net-net value is calculated by deducting total liabilities from the adjusted current assets. Core Criteria (10)
In order to reduce risk even further a company being evaluated with this approach must meet certain standards. This helps strengthen our pick, increase our confidence, and most importantly, helps us avoid a value trap. Let’s go over them fairly quickly with Nautilus.
Not Chinese: PASS
Our first Criterion is making sure the company is not Chinese. Unfortunately, it is incredibly difficult to trust the numbers of a Chinese Company. They are very notorious for the China Hustle, questionable auditors, and much more.
Industry and Sectors: PASS
When it comes to this particular approach generally, you want to avoid sectors like Biotech, Pharma, Pot Stocks, and Energy. These sectors and industries tend to spend a good portion of their life below or near liquidation values. The odds of a company that has a history of spending time trading that low having a turnaround are rare. These also tend to spend money quickly, you don't want to be trapped in a company that spends heavily on R&D or, in general, that can spend its cash overnight changing your valuation drastically.
Share Dilution: PASS
Nautilus has a history of keeping outstanding shares pretty stable. Therefore, there are no causes for concern over a major share dilution that can change our numbers. In the past 5 years, the company has had 29.6M, 29.8M, 30.3M, 30.4M, and 31.5M. In total that's an increase of 6.41% in the course of 5 years, very manageable. Looking into years beyond 5 years, there was a history of buying back shares which is a great thing. No concerns here.
Burn Rate: PASS Like a lit cigarette, that is burning closer and closer to the filter until there are no puffs left. We want to see how fast it's burning. To see if we will even get a chance to take a final puff or if it'll die out before we try. From another perspective, it shows how fast a company is losing money. Positive results mean our estimated value is growing, while negative results would mean our given valuation is shrinking. We want to know what direction it's headed, and how fast. A gem I can through your way is that time is the friend of a growing company, while time is the enemy of a dying company. In the case of NLS their Total Common Equity has been relatively within the same range of $90M on the lower end to $180M on the higher end in the last 10 years, usually sticking above $120M. It’s a rollercoaster, but not a major concern. We can also make an estimate of the future outcomes.
The organization's NCAV YoY change was %. Here, we generally want to stick towards a burn rate at or better than -25%.
Debt/Equity: PASS As a rule of thumb, we mainly want to stick with companies that have both LT Debt/Eq & ST Debt/Eq below a ratio of 1. In this case. NLS has an LT Debt/EQ of 0.17, and a Debt/Eq of 0.18. In fact, in the last 7 years, it has never had a Debt/Eq above a ratio of 0.50. Anything under 0.50, helps give a hint of the quality of the company towards its debt. We love ratios sub 0.50. Dividends: PASS Short and simple, NLS pays no dividends, in our case, this is a great thing. More money is kept within the company instead of being paid out. We don't have to worry about any changes in our valuation trying to premeditated dividend payouts. Plus, we are not long-term investors here, it’ll hardly make a difference for us. It’s favorable with our approach not to have dividends.
Ownership: PASS Institutional Ownership stands at 42.79%, while Insider Ownership stands at 9.65%. We try to avoid stocks that have a very high/concentrated insider ownership. Without getting too much into it, it helps avoid us being stuck as not many shares can be traded, and/or face the risk of massive selloffs by insiders. As far as the Top Hedge fund holders, in the first place we have BlackRock with 6.38% of the outstanding shares, followed by Vanguard at 5.42%, then Quinn Opportunity at 4.75%. I believe there is no concern here either. The only negative comment I would leave here is how Institutional Ownership is higher now compared to March 2020 during the covid crisis. At the time the stock was trading around $1.30 to $2.25 (very similar to now) with roughly 25% institutional Ownership. Preferably, it best to buy stocks when the amount of firms and the percentage owned is low. Buying equities during distressed Institutional Ownership times can be extremely helpful for your valuation and targets.
Liquidity/Daily Volume: PASS
Liquidity in my own definition for this section is just how fast you can buy into the company, and sell out if you needed. How fast can you liquidate your position if needed. I feel comfortable with stocks that have a high and fast liquidity, or high volume compared to their market cap. NLS 5-day average volume is 430k, 20-day is 948k, 50-day is 1.08M. In short, small accounts should have no issues here, even someone like me with much more capital can manage to get a sizable position with ease in a span of a couple of days to a week.
Doji/History/Volatility: PASS Real quick, for this criterion it's best to take a quick look at the company's previous price history. This will help you avoid buying into a stock that has a history of being overall flat, or too-too boring. We don't mind boring, but there is a fine line. For example, if in the past 5 years, or let us say 3 it's been roughly around the same price range, for whatever reason it will be highly unlikely that will change for the foreseeable future. The odds of catching the final stages of it trading low, or flat are slim to none. We want it to be on the higher end of the volatility spectrum to help us reach our reasonable valuation/target. It also helps confirm if it's a short-lived, off-chance wrinkle that we benefit from.
NLS has a NCAV of $1.82, while the current price is $1.70. Could definitely be much better, but we also need to weigh on that the company has a history of turning up a profit and positive FCF. More on this later.
NLS has a NNWC of roughly -$0.45, while the current price is at $1.70. In this part, it does indeed fail. But, let me explain why this is not a concern in my personal opinion. Because in this case we are not “literally” liquidating the company. That’s just a mentality approach to reduce risk and buy assets at a great value. More on this later.
Let’s break down where our NCAV result comes from. The formula goes as followed:
NCAV = (Current Assets - Total Liabilities - Minority Interest - Preferred Shared) / Total Shares Outstanding NLS Total Current Assets are $207.3M, Total Liabilities stand at $150M and there are no Minority Interest or Preferred Shared. Their current Total Shares Outstanding are 31.47M. This means the math goes as follows: ($207.3M - $150M - $0 - $0) / 31.47M = $1.82 NCAV = $1.82
The stock's current price is $1.70, and NCAV is at $1.82 which means the stock is currently trading -6.6% below NCAV. Is it below NCAV? Absolutely! The only problem here is that there is no significant margin of safety, and not much room for error/uncertainties. I will explain why this does not concern me later. But, for now, let us quickly calculate its possible NNWC Value. NNWC Results
Let’s break down where our NNWC result comes from. The formula goes as followed:
NNWC = (Adjusted Current Assets - Total Liabilities - Minority Interest - Preferred Shared) / Total Shares Outstanding.
Notice how the only difference is the fact that we are going to adjust its total Current Assets for a “worst-case” scenario. We already know the company has Total Liabilities of $150M and that there are no Minority interests or Preferred Shared. We also know their current Total Shares Outstanding is 31.47M. No changes are needed here. Let’s look at what line items build out Total Current Assets:
Total Cash & ST Investments: $12.9M Total Receivables: $63.5M Inventory: $111.2M Prepaid Expenses: $14.5M Restricted Cash: $5.2M
Total Current Assets = $207.3M
Now, lets discount them/adjust them:
Total Cash & ST Investments: $12.9M (no change/no discount its cash) Total Receivables: $63.5M ( 25% off = $47.625M) Inventory: $111.2M (-50% off = $55.6M) Prepaid Expenses: $14.5M (No change) Restricted Cash: $5.2M (No Change) Adjusted Current Assets = $135.83M
Adjusted Current Assets $135.83M - Total Liabilities $150M) / Total Shares Outstanding 31.47M = -$0.45
NNWC = -$0.45
Here, we do fail. As you can see the company returns a negative result which means it would end up owing money. A.K.A, Cause for Bankruptcy. Worthless. Now, let me explain why it does not matter or concern me. No Cause for Concern
For starters, we already got a greater than current market price result on NCAV. Keep in mind, that this only includes current assets. Meaning we completely disregarded long-term assets, such as Net property, Plant & Equipment, and other long-term assets. There’s also Goodwill & Other Intangibles along with other line items but we won't be counting these as it wouldn't make sense to, I won’t get into why here. Second, we also need to understand that using a liquidation strategy is just a mental approach. The reality is we are not actually about to see the company liquidate. In many cases, before that even occurs there can be a merger, a buyout, or many other options. To an extent, it's just a trick to reduce our risk and buy better value. In this case, we can add back some of the assets we ignored. In our original NCAV, we got a market cap of $57.5M. (Total Current Assets - Total Liabilities: before dividing outstanding shares.) Let’s take a look at some other assets we can add back to its value:
Net Property, Plant & Equipment: $55.7M Other Longterm Assets: $7.8M = $63.5M
$57.5M + $63.5M = $121M Market Cap
$121M Market Cap Value / 31.47M Shares Outstanding = $3.84
The stock is at $1.70, that's a -55.73% difference from the new value of $3.84. As you can see, buying into the assets alone after paying back all its debt and liabilities has money left over for shareholders. And, if you bring back the fact that we are not actually aiming for liquidation, and that the company will remain listed and continue to trade on the market, it's a pretty good discount.
Let’s go deeper into it finding out a new value but with the new line items also discounted/adjusted in:
Total Cash & ST Investments: $12.9M (no change/no discount its cash.) Total Receivables: $63.5M ( 25% off = $47.625M) Inventory: $111.2M (-50% off = $55.6M) Prepaid Expenses: $14.5M (No change) Restricted Cash: $5.2M (No Change)
Adjusted Current Assets = $135.83M
Net Property, Plant & Equipment: $55.7M *Note: $19.1M of PP&E is Machinery which I will separate to discount apart PP&E: $36.6M (25% off = $27.45M) Machinery: $19.1M (70% off = $5.73M) Other Longterm Assets: $7.8M (25% off = $5.85M)
Adjusted new line items = $39.03M
$135.83M + $39.03M = $174.86M
$174.85M - Total Liabilities $150M = $24.86M / 31.47M = $0.79
The stock is at $1.70, which means our adjusted/discounted value is roughly -55% lower than the current market price. Again, this is with our “salvage/liquidation mentality behind it.” We don’t truly believe this company will be liquidated, we believe it will carry on operations. To further reduce risk, if the company carries on operations which I am pretty positive it will, it can bring in Net Income and/or FCF which can be added to our balance sheet.
Net Income & FCF
10 out of 12! That's 10 out of the last 12 years that the company reported a positive Net Income and Positive FCF. From 2011 to 2022, those ranged from $1.4M to $60M, an average of roughly $25M. I don’t want to spend too much time in this section, but it is something to consider. I personally believe the company will bring back a positive Net Income and FCF. Which, within itself would automatically make the company more valuable, and certainly bring in hype and attention. For example, if it reports a $5M positive, it would then be trading (if it was at this current range or lower) at a 5X Net Income. We can all agree that would be pretty cheap if it carries it forward, especially if that grows in the years after. I just wanted to make it clear, that we are not looking at a company that has a history of only taking losses. In fact, NLS has positive Retained Earnings of $158.1M, which means since inception that is how much cash the company has produced. All these little touches just help reduce risk. They increase the odds of the idea playing out well.
Staying Afloat / Increasing debt
As of now, the company is losing cash and does have negative earnings. Both for the end of 2022, and its estimate for 2023. The question here is how much cash does it have to stay afloat as it stands, and could it possibly take on more debt to continue operations. To dumb it down, and make this part simple, let's assume the company going into 2023 has no more money to operate and needs to seek out a loan. Let us assume they take on an extra $30M in debt plus roughly $5M in interest which is 16.6% of the $30M. That would be roughly $35M added to its debt/liabilities. Assuming they used up all the cash and it needs to be paid back, from its current standing that would increase its total liabilities from $150M to $180M. If we went back to our NCAV that included the extra line items that would leave the new value as followed:
NCAV $207.3M + added line items $63.5M = $270.8M
Total Liabilities would increase from $150M to $185M after adding the extra $35M in debt.
$270.8M - $185M = $85.8M Market Cap
$85.8M Market Cap / 31.47M Shares Outstanding = $2.73
That’s a $2.73 valuation while it stands at $1.70 in the current market. In fact, we can lower equity or take on another $35M in Liabilities for a total of $220M. That would still give us a valuation of $1.61. It is under, but this just proves how protected your downside is. All the changes and bad things that need to happen and you’d still about break-even, or have small losses. Expected losses, and most importantly controlled losses. Big reward, little risk. Quick Insights
Decrease Burn Rate/Lowering Cost "Elevated inventory levels at retail partners are slowing down reorders and shifting them to later in the year. Therefore, we expect the second half to represent between 65% and 70% of full year sales, slightly higher than pre-pandemic second have seasonality of approximately 60%. We are expecting the start of gross margin recovery in the second half and expect gross margins to be in the range of 27% to 30%, driven by key actions we've taken, particularly in supply chain of North Star pillar. We expect lower inbound freight as we've negotiated new rates that while higher than pre-pandemic are much lower than the spot market rates last year, lower detention and demurrage fees as we've digested the inventory we purchased last year."
"We plan to close one of our DCs at lease expiration this fall, and we won't be renewing leases for some of the storage locations we obtained at the height of the pandemic. Additionally, we've negotiated lower costs for our top SKUs. New incoming inventory will have a lower cost base. And lastly, while our guidance includes room for discounts to be competitive during fitness season, our better inventory position reduces some of the pressure relative to LY." JRNY app 1 market share in unit sales, recording higher unit volume than any of our competitors, highlighting not only our popular products but also improvements in supply chain capabilities. Churn in membership growth was also a bright spot as we significantly eclipsed our fiscal '22 year-end goal, delivering 325,000 JRNY members, exceeding our goal of 250,000 by fully 30%. We grew JRNY members by 200,000 for the year.
"As a result of these actions, as mentioned, I'm delighted to say that we ended fiscal '22 with over 325,000 JRNY members, surpassing our original goal. Because of the enhancements we made to JRNY in fiscal '22, members are realizing how JRNY can help them meet their training goals through adaptive personalized training. JRNY acts as a personal trainer and provides you with progress tracking by measuring and analyzing your improvements and continually adapting to your fitness level and goals. In addition to the AI-driven individualized adaptive workouts, we have expanded our instructor-led content library and added more of our popular immersive explore the world experiences."
"JRNY brings an industry-leading level of variety to the fitness experience. It is available across both cardio and strength. It offers a variety of ways to work out, which is what our target consumer craves. In addition to now having hundreds of thousands of people doing millions of workouts a year on JRNY, we have now begun to build our subscription business."
VAY Acquisition Last fall, we acquired VAY, a leader in vision systems. We have been focused on integrating VAY's motion-tracking capabilities into JRNY to further advance and accelerate our highly personalized strength workouts, including rep counting and form coaching with our product offerings, as well as others. We are on track to begin beta testing these features with consumers during the second quarter, further enhancing the SelectTech on JRNY experience we launched last November. Bowflex has long been a leader in strength, and we shipped more units of strength equipment than anyone else in fiscal '22.
SKU reduction "We reduced SKUs by more than 25%, and we have narrowed our brand choices. While more than doubling our revenue at the peak, we increased our headcount by less than 20% and intentionally kept our cost structure variable to maintain agility in volatile times."
Short float shows you what percentage of the outstanding shares afloat are being shorted. In the cause of NLS, the short float is 15.95%. That means of the 30.40M shares float, (not total outstanding) about 4.85M of them are being shorted. As contrarians, we support these higher short floats, of course, which means a good portion are bearish on the company or have a negative sentiment. However, given the valuation we gave it, it's a good indication that many of those might start closing their shorts, which means they’ll have to start buying back shares, thus a positive push on the stock price.
Time Length/ Span
I estimate this stock can have a very handsome return but in the time span of up to 2 years. Of course, in the past, I‘ve had stocks meet my expectations a lot sooner, as soon as 6 months. Times are certainly different today with everything going on so I will not raise my hopes. Plus, in reality, when you look at the great value investors who tackled this approach, they too have an average of at least a 2 year hold time. Patience mixed with the correct temperament is key. Remember, you don’t make money when you buy a stock, and you don’t make money when you sell a stock. You make money by waiting.
Thought the equity will be extremely volatile and requires great temperament and a tough stomach. I believe the reward-to-risk ratio is a worthwhile investment. I like the odds of the stock going my way. I like the minimal losses that I believe I can take on “valuation-wise”. (The stock is not the company and the company is not the stock) The ROI could be very generous.
The information shared throughout the article/report/analysis/blog is personal results and opinions. Please understand that everyone may have different opinions and effects, it is not implied to duplicate or mirror anything shared. The average person who follows any "how-to", "educational", “investment ideas” or “information” gets little to no results. Results will vary and depend on various circumstances, including but not limited to, your background, experience, barriers, timing, lengths, limitations, and work ethic, timing, temperament, patience. All investments and trades entail risk. If you're not willing to accept that, I advise you to disregard anything and everything you just read.
“I”, “Me” the author and the writer of this article/report/blog/analysis currently is building a position on Nautilus, Ticker $NLS. As of this writing, I do own +361,156 shares at an average of $1.84 for a total investment of $664,527.04 USD. This represents a 1.15% ownership in the total shares outstanding. (I bought shares all between $1.71 and $1.90 to get my average). This is with the intention to double down on my position if I see the equity fall lower to lower my cost basis per share average.
Final Note from author
My goal releasing this report would be to get some opposing views. I would like to be challenged to see if I missed something, or to see if my thesis still stands strong against any negative feedback, worries, or bad catalysts. I would like to view it through the eyes of a bear or pessimistic bystander to get different perspectives. These challenges would help me build a stronger case, and tie up any loose ends if possible. Thank you.