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.
Summary
•
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.
