Daily Gains Letter

This Bullish Play Can Do the Workout for You

By for Daily Gains Letter | Feb 26, 2013

















260213_DL_whitefootSome investors looking to add some muscle to their investment portfolio look to stocks that are expected to benefit from growth in one or two demographics. Ideally, however, it’s great to find investments that appeal to all age groups and can profit from a number of different opportunities.

The Great Recession continues to significantly impact the way American consumers spend their money. That said, there are some industries that have shown resiliency.

In 2007, revenues for the worldwide fitness industry came in at $61.5 billion; in 2008, this number increased to $68.2 billion. While the start of the Great Recession had a negative impact on the fitness industry, its effects were muted. In 2009, worldwide sales dipped slightly to $67.0 billion, only to rebound in 2010 and 2011, increasing to $71.0 billion and $72.7 billion, respectively. (Source: IHRSA web site, last accessed February 25, 2013.)

Closer to home, the U.S. fitness equipment manufacturing industry generates annual revenues of about $3.0 billion, with the top-five companies accounting for more than half of the total revenues.

Nautilus, Inc. (NYSE/NLS) operates as a consumer fitness products company primarily in the United States and Canada. The company’s brand portfolio includes: Nautilus, BowFlex, Schwinn Fitness, Universal, CoreBody Reformer, and Peak Fit System. Nautilus sells its fitness equipment directly to consumers through its brands’ web sites, catalogs, and television commercials. In 2010, Nautilus exited the commercial fitness category so it could focus entirely on providing gear that consumers can use at home.

Nautilus has a market cap of $186 million, a forward price-to-earnings (P/E) ratio of 13.4, $15.2 million in cash, no long-term debt, and levered free cash flow of nearly $8.0 million.

The company said that third-quarter revenues were up 1.7% year-over-year at $38.1 million. The company reported net income (including discontinued operations) of $951,000, or $0.03 per share, versus a loss of $92,000, or breakeven per share, in the same prior-year period. Income from continuing operations for the third quarter ended September 30, 2012 was $1.2 million, or $0.04 per share, compared to $0.3 million, or $0.01 per share, for the same period last year. (Source: “Nautilus, Inc. Reports Results for the Third Quarter 2012,” Nautilus, Inc. web site, November 5, 2012, last accessed February 25, 2013.)

For the first nine months of fiscal 2012, revenues were up seven percent at $129 million. The company reported year-to-date net income (including discontinued operations) of $3.3 million, or $0.11 per share, versus a loss of $1.8 million, or $0.06 per share, in the same prior-year period. Nautilus reported year-to-date net income from continuing operations of $3.4 million, or $0.11 per share, versus a loss of $794,000, or $0.03 per share in the first nine months of fiscal 2011.

The strong improvement in results from continuing operations primarily reflects improved gross margins and higher operating income from the company’s direct marketing business.

Bruce M. Cazenovia, CEO of Nautilus, stated, “The momentum in our Direct business is encouraging, and the positioning of both the Retail and Direct businesses for more profitable growth in the future is advancing as planned. New products remain a top focus area for the company and we have a number of exciting products hitting the marketplace during the fall/winter season.” (Source: Ibid.)

In January, Nautilus announced its preliminary, unaudited results for the fourth quarter and fiscal year, ended December 31, 2012. The company expects to report fourth-quarter net sales of approximately $65.0 million, an increase of 8.4% compared to the fourth quarter of 2011. Fully diluted earnings per share from continuing operations are estimated to be in the range of $0.21–$0.23 for the fourth quarter of 2012, compared to $0.11 per share for the fourth quarter of 2011. (Source: “Nautilus, Inc. Reports Preliminary Unedited Results for the Fourth Quarter 2012,” Nautilus, Inc. web site, January 16, 2013, last accessed February 25, 2013.)

For fiscal 2012, net sales are expected to climb 7.5% to approximately $194 million. Fully diluted earnings per share from continuing operations on a full-year basis are expected to be in the range of $0.32–$0.34 in 2012, versus $0.08 per share in 2011.

Cazenovia also noted, “Continued margin improvement and tight management of our expenses enabled us to deliver significant bottom line improvement versus the same period in the prior year. In 2011, we implemented a number of operational initiatives to drive improvements in three key focus areas of our business: increase margins, increase new product innovation, and increase leverage of our operating costs. Our fourth quarter results are further affirmation that our plan is solid and our initiatives are working.” (Source: Ibid.)

Nautilus plans to release its full operating results for the fourth quarter and full-year 2012 in early March 2013.

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Chart courtesy of www.StockCharts.com

Despite reporting improved second-quarter results on August 6, 2012, Nautilus’ share price tanked after it provided a weak outlook for the remainder of the year. Fortunately, the weak results never materialized, and the company’s share price has been in an uptrend. In late November, the company’s 50-day moving average (MA) crossed above its 200-day MA—a bullish indicator. And since the beginning of 2013, Nautilus’ share price has been particularly bullish, climbing 70%. Trading at a four-plus-year high, Nautilus’ share price has been consolidating over the last few weeks, with tested support near $6.00.

Over the years, Nautilus has built a strong portfolio of recognized brand names, and it has refocused its operations away from the low-margin commercial fitness market to the higher-margin consumer market.

The company also has great brand awareness. Schwinn was the dominant bicycle manufacturer during much of the 20th century. It was also the bicycle of choice for many baby boomers. Those born more recently are exposed to Nautilus on a daily basis as a result of the many BowFlex infomercials.

The U.S. is the dominant player in the global fitness industry, capturing 30% of total revenues for the market sector. While Nautilus is synonymous with home exercise equipment in North America, there is plenty of opportunity for this company to expand its international footprint—especially when you consider the fact that the company’s current international sales account for just one percent of total sales.

Nautilus is a profitable, financially robust company with growing revenues and a great outlook. The company also has a strong foothold in the lucrative North American market and great brand recognition.

Going forward, the company’s new product plans and restructured operating platform are key elements of its strategy to successfully grow revenues, leverage operating expenses, and continue to improve operating margins, all while expanding its product portfolio.

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