Friday, February 5, 2016

33rd AIM student equity update by Robert Uhland, "Power Lifting with Nautilus"

NLS (Nautilus, Inc.): Tie the Naut with Nautilus
By: Robert Uhland, AIM Student Analyst at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

• Positive guidance for 4Q 2015 driven by successful development of new products and strategic initiatives
• Strong momentum generated by projected double-digit revenue growth increases in both reportable segments: Direct and Retail
• Synergies from recent acquisition of Octane Fitness are the key to growth initiatives moving forward
• Active contributions to innovation in the fitness industry should continue to propel NLS forward in 2016.
• Concurrent launches of Bowflex and Schwinn products in New Zealand and Australia, the UK, and Switzerland set to generate significant momentum for NLS

Nautilus, Inc. (NYSE:NLS) offers a well-poised growth opportunity in a constantly evolving fitness equipment industry. Currently, trading at $18.94, NLS offers a phenomenal entry point through an industry-leading brand into this highly fragmented industry. NLS has been able to maintain an edge over its competitors like Escalade, Johnson, and Weight Watchers in the fitness industry due to its ability to be an industry-moving innovator, trend aware business with a sound capital structure.

The acquisition of Octane fitness on January 4th, 2016 enables NLS to penetrate new channels to expand the breadth of exposure for the company. Octane is on track to do around $65MM in sales for FY 2015 and is well-positioned to ramp up NLS’ global footprint moving forward. This strategic acquisition is set to be accretive to earnings immediately, diversifies the portfolio product mix, and gives NLS the ability to target a higher price point consumer segment riding on the curtails of the fastest growing brands in the fitness industry.

The fitness industry is highly fragmented- the fifty largest companies account for a minority (30%) of the market. Given NLS’s current position, the upside potential is enormous. The company’s increased exposure abroad and new innovations with smart technology intertwined in the Bowflex Max Trainer and the Schwinn Airdyne AD Total Fitness Bike should enable NLS to surge in 2016. I feel that its most recent acquisition is a step in the direction toward de-fragmenting the fitness industry and hence, taking a majority stance amongst the smaller players.

What has the stock done lately? Over the past three months, NLS is up 10.76% and has begun to take off. On January 19th, NLS management instilled confidence in investors and backed its ability to continue to outperform quarter-to-quarter (+16%-Direct and 21%-Retail) and year-over-year (+22%) led by its robust brands in Schwinn, Nautilus, and Bowflex. This momentum should propel the company forward into 2016 as positive guidance has already led to a 5.5% increase since its release on the 19th.

Source: FactSet

Past Year Performance: NLS has increased 28.61% over the past year and is up 13.46%YTD. Driven by its compelling brand presence domestically and international expansionary efforts, NLS has taken the reigns of the fitness industry and is taking a ride to the top. When NLS reported Q3 2015 earnings, their results were exceptional- gross margin and operating margin increased 31.2% and 78.3% respectively vs. the first nine months of 2014.

Source: FactSet

My Takeaway
With obesity set to reach record highs moving forward to 2016 and on, coupled with record highs in consumer confidence, spending, and disposable income, and topped with exceptionally depressed oil prices, NLS is in a position to generate favorable returns. I feel that the stock has been nothing short of stellar despite relatively moderate expansion in the fitness equipment environment (+22% revenue growth vs 3.3% industry). Hitch up with Nautilus before the company releases 4Q earnings on February 22nd, as I see NLS taking off with the acquisition of Octane Fitness and positive expansionary efforts into Europe, Australia and New Zealand. 

With a strong track record of beating earnings, a stud management team fueling unparalleled experience and growth, a rock solid balance sheet, and aggressive expansionary efforts, I strongly believe that NL is undervalued and its premium multiple is warranted. I foresee this premium multiple continuing to grow moving forward as NLS continues to capture market share, improve margins through efficiencies, and grow its robust brands. Taking into consideration the aforementioned drivers, I feel that NLS is an overlooked growth play in a primed fitness industry.

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