NAUTILUS Inc.
By: Roman Fan, Jeffery Li, Yifan Liu, Siyu Xu
Presented April 23, 2015
Agenda
• Screening Process
• Company Review
• Relevant Stock Market Prospects
• Macroeconomic Review
• Financial Analysis
• Financial Projection
• Application of Valuation Methodologies
• Recommendation
Screening Process
Mkt Cap<$1.5B
Non-Financial
Sector
EBIT/Tangible Assets
> 15%
Among 7 companies,
choose NLS (Strong
growth in Revenue
and Profit)
Altman Z Score>6
Piotroski Score>=6
Introduction - Nautilus Inc.
• Consumer fitness equipment company
• Designing, Developing, Sourcing and Marketing highquality cardio and strength fitness products
• Brand Portfolio: Nautilus ® , Bowflex ® , Schwinn ® and
Universal ®
•
•
•
•
•
•
Located in Vancouver, WA
Founded in 1986, Public since 1999
Ticker Symbol: NLS (NYSE)
Last Closing Price:17.34 (4/22/2015)
Market Cap: 545M
P/E: 27; Fwd P/E: 20.64; EPS: 0.59;
Source: Yahoo Finance; Nautilus 2014 - 10K
Nautilus Inc. – Business Segment
• North America Focus
• Three Business Segments
Royalty
2%
• Strength, Cardio, Royalty
• Multi Sales Channel
• Direct Channel
•
•
•
•
Direct to consumer
Media Penetration Depended
Gross Margin: 63.7%
Financing vs. Non-financing
• Retail Channel
• Leverage brand recognition from
direct sales channel
• Independent Retailer
Others
3%
Canada
13%
Retail
34%
Direct
64%
U.S.
84%
Royalty
2%
Strength
19%
• Sport Authority, Dick’s Sporting
Good, Walmart, and Academy
• Gross Margin: 25.4%
Source: Nautilus 2014 - 10K
Cardio
79%
Nautilus Inc. – Designing & Developing
Continual
Consumer
Feedback
In- depth
Consumer
Research
Fitness
Result
Validation
Ground Up
Design
Rigorous
Equipment
Testing
Source: Nautilus Presentation at 2015 ROTH Conference
Nautilus Inc. – Sourcing
• Completely outsourcing the manufacturing
• Local inspection office
• 2-3 months of production and transporting time
• Raw material cost is off-loaded to manufacturers
• No purchase commitment
• Extended payable outstanding time with manufacturers
• Three warehouses for Direct Sales: Oregon, Ohio and
Manitoba
• 54% retail orders shipped directly from manufacturers
Source: Nautilus 2014 - 10K, page 3
Nautilus Inc. – Marketing
• Marketing is crucial in generating leads for direct sales
• Mix media portfolio: Social(FB, Twitter),
Digital(Google, Yahoo), TV(ESPN, ABC, etc.), Printed
media(Weight Watchers, etc.).
• Consistently monitor the efficiency with inquiries
generated, cost-per-lead, conversion rates, return on
investment
Source: Nautilus 2014 - 10K, page 4
Nautilus Inc. – Management
Source: Bloomberg
Nautilus Inc. – Management
Source: Bloomberg
Relevant Stock Market Prospects
Source: Yahoo Finance, NLS, as of 4/23/2015 Pre Market
SWOT
• Leading provider of consumer
fitness equipment
• Strong portfolio of brands,
including #1 in the fitness industry
(Bowflex ®)
• Multichannel growth
strategy
• Low leverage
• Presence in only cardio and
strength segment
• Premium sporting
equipment
• International market
penetration
• Third-party credit approval rate
rised
• Require continuity in technology
development and patent holding
Source: Nautilus Presentation at 2015 ROTH Conference
• Highly dependent on a few
retailers
• Maintain a sustainable media
planning
• Credit approval rate reliance
Macroeconomics
Increasing
Health
Consciousness
Spur Demand
for Sporting
Goods and
Equipment
Increasing
Purchasing
Power
Source: Ken Research Private Limited
Potential Growth in International Market
North America
• Mature
market
• 3.5% annual
growth
• Market 3.6B
EMEA
• Mature
Market
• 3% annual
growth
• Market 3B
Source: Nautilus Presentation at 2015 ROTH Conference
Asia Pacific
• Emerging
market
• >15% annual
growth
• Market 1.18B
Latin America
• Emerging
market
• 10% annual
growth
• Market 0.4B
Nautilus Inc. – Industry Analysis
U.S. online shop and mail-order sales of sporting goods from 2003 to 2013
Rising trend on online shopping of sporting goods
Source: US Census Bureau data on Statista
Nautilus Inc. – Industry Analysis
Distribution of sporting goods purchases by category in the U.S. in 2012
Equipment: highest spending among sporting goods
Source: National Sporting Goods Association data on Statista
Nautilus Inc. – Industry Analysis
Sports equipment by average price in the U.S. in 2013 (in U.S. dollars)
House gym products pricing ranks higher among sports equipment
NLS’s products are at a relative higher price point compared to average
Source: National Sporting Goods Association data on Statista
Nautilus Inc. – Industry Analysis
Average retail price of elliptical/cross-trainers in the U.S. from 2007 to 2013
Average Product Price = $600
Price is relatively Stable
Source: National Sporting Goods Association data on Statista
Nautilus Inc. – Industry Analysis
Two customer categories:
Consumer category
comprises equipments which
individuals may purchase for home
use
Institutional category provides
equipment generally found in
fitness centers
Main trends:
 Wholesales bypass increases due to the development of E-commerce. Manufacturers can sell their products
directly on their website. Retail Decrease, Direct Sale Increase
 Schools are becoming a larger purchaser of gym and exercise equipment, as government encourages more
exercise for young population.
 Outsourcing the manufacture of industry goods has been a major trend.
Source: IBISWorld Gym & Exercise Equipment Manufacturing in the US
Nautilus Inc. – Industry Analysis
Cardiovascular equipment:
Including treadmills, exercise bikes or stair steppers
Popular in health clubs, demand increase
Weight machines:
Most consumers cannot afford a full array of weight machines,
Therefore, machine is popular in club and rehabilitation centers
Free weights:
Including dumbbells, barbells and kettle bells.
Small size, popular among consumer market
Other:
Exercise balls, stepping platforms, boxing bags, etc
Source: IBISWORLD - Gym & Exercise Equipment Manufacturing in the US
Nautilus Inc. – Porter’s Five Forces
Competitive rivalry within the industry (High)
•
Many players in this industry provides similar products
•
High demand on innovation and new products
•
Intense price competition
Bargaining Power of Buyers (High)
•
Customers can get access to different brands via various channels
•
Strong correlation to personal disposal income
Bargaining Power of Suppliers (Low)
•
International suppliers from low-cost countries: Asian countries
•
Supplier is easily replaced as the switching cost is low
Threat of New Entrants (Low)
•
Significant capital requirements needed to new company
•
Product knowledge and innovation with intellectual property rights
•
Brand reputation and customer loyalty
Threat of Substitutes (Moderate to High)
•
Many other sports to choose
Comparable Analysis
Company Name
Johnson Health Tech Co., Ltd. (TSEC:1736)
Star Fitness S.A. (WSE:SFI)
Brunswick Corporation (NYSE:BC)
Public
Amer Sports Corp. (HLSE:AMEAS)
ICON Health & Fitness, Inc.
American Telecast Products, LLC
Life Fitness, Inc. ( Conso in BC)
Private
Cyber International Corp
Fitness Quest Inc.
Company Name
TEV/
Revenues
TEV/EBITDA TEV/EBIT P/E
P/B
Nautilus Inc. (NYSE:NLS)
1.7x
14.0x
15.9x
27.3x
5.6x
Johnson Health Tech Co., Ltd. (TSEC:1736)
1.4x
13.9x
17.5x
9.1x
2.8x
Star Fitness S.A. (WSE:SFI)
1.8x
18.9x
25.0x
30.8x
5.3x
Brunswick Corporation (NYSE:BC)
1.3x
11.0x
13.4x
26.5x
6.1x
Amer Sports Corp. (HLSE:AMEAS)
1.3x
13.7x
17.3x
45.1x
7.5x
Comparable Analysis
Weights
Johnson Health Tech Co., Ltd. (TSEC:1736)
40%
10%
30%
20%
Star Fitness S.A. (WSE:SFI)
Brunswick Corporation (NYSE:BC)
Amer Sports Corp. (HLSE:AMEAS)
Weight Average
Multiples
TEV/ Revenues
TEV/EBITDA
TEV/EBIT
P/E
P/B
Valuation
TEV/ Revenues
TEV/EBITDA
TEV/EBIT
P/E
P/B
Price
Multiples
1.4x
13.5x
17.0x
23.7x
5.0x
Revenue
EBITDA
EBIT
EPS
TABG BV
$12.11
$14.65
$16.28
$15.16
$15.59
$14.77
Weight Average Multiples
TEV/ Revenues
TEV/EBITDA
TEV/EBIT
P/E
P/B
NLS Data
$274.40
$34.20
$30.20
$0.64
$98.60
20%
30%
30%
10%
10%
1.4x
13.5x
17.0x
23.7x
5.0x
Financial Analysis
Profitability
Margin
60.0%
60.0%
40.0%
50.0%
20.0%
40.0%
0.0%
30.0%
(20.0%)
20.0%
(40.0%)
10.0%
(60.0%)
0.0%
(80.0%)
(10.0%)
2010A
2011A
2012A
Gross Margin %
2013A
2014A
2010A
2011A
Return on Assets %
Operating margin
0
2.5x
(5.0)
2.0x
(10.0)
1.5x
(15.0)
1.0x
0.5x
0.0x
Avg. Cash Conversion Cycle
Return on Equity %
80.0%
8.0
60.0%
6.0
40.0%
4.0
(20.0)
20.0%
2.0
(25.0)
0.0%
(30.0)
2012A
2014A
Solvency
3.0x
2011A
2013A
(100.0%)
Liquidity
2010A
2012A
2013A
Current Ratio
2014A
Quick Ratio
0
2010A
2011A
2012A
Altman Z score
Total Liabilities/Total Assets
2013A
2014A
Total Debt/Asset
Financial Analysis
Greenblatt
300.0%
200.0%
100.0%
0.0%
-100.0%
2010A
2011A
2012A
2013A
2014A
-200.0%
EBIT/(NWC+Fixed assets)
30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%
-40.0%
-50.0%
EBIT/(mkt value of equity+debt)
DuPont Analysis
Tax Burden=net income/EBT
2010A 2011A 2012A 2013A 2014A
247.8% 44.6% 162.1% 299.0% 62.2%
Interest Burden=EBT/EBIT
95.8% 88.6%
Operating Profit Margin = EBIT/ Sales
-5.7%
2.0%
5.7%
7.2%
11.0%
Asset Turnover = Total Sales/ Total Asset
2.15
2.18
2.06
1.52
1.56
Leverage = Total Asset/ Total Equity
2.54
2.59
2.18
1.57
1.58
-74.0%
4.4%
39.0%
52.4%
16.9%
2.63
2.76
2.73
2.13
2.65
ROE
Asset Turnover Without Cash*
94.9% 102.0% 100.2%
Assumption Page
• Built 6 scenarios (Base, Bull, Bear * Successful in
international market, or not)
• Revenue projected based on Cardio and Strength
segments for each of the Direct and Retail sales
• Also decreased SG&A, COGS as company
experienced increasing margin
• R&D increased but decreased as % of sales
• Decreasing in the Change Net Working Capital, as
AP+, AR=, INV=
Assumption Page
Sales growth rate
Revenue
Direct
Cardio products(1)
Strength products(2)
Retail
Cardio products(1)
Strength products(2)
Royalty
Cost of sales % of Rev
COGS
Direct
Retail
Royalty
Other accounts
Selling and marketing of sales yoy growth
General and administration of sales
R&D of revenue
tax rate of pre-tax rate
Account Receivables as % of Rev
Inventory as % of COGS
Accounts payable of COGS
Depreciation
Amort. of other Intangibles
Capital Expenditure
2010A
2010A
2010A
2010A
2010A
2015E
2016E
2017E
2018E
2019E
7.1%
7.5%
12.8%
25.4%
21.9%
19.7%
17.4%
13.8%
12.0%
10.8%
16.7%
9.3%
28.5%
25.8%
22.6%
18.6%
14.1%
11.4%
39.6%
32.5%
14.1%
39.5%
30.0%
25.0%
20.0%
15.0%
12.0%
-26.5%
-21.8%
-10.2%
-29.7%
-18.0%
-18.0%
-18.0%
-18.0%
-18.0%
1.2%
-6.9%
20.2%
21.4%
15.5%
14.5%
15.4%
13.3%
13.6%
0.2%
-17.2%
1.3%
53.3%
20.0%
10.0%
15.0%
15.0%
10.0%
2.9%
11.3%
44.8%
-7.8%
-5.0%
5.0%
-5.0%
-7.0%
2.0%
19.2%
6.2%
6.1%
4.6%
5.5%
5.2%
5.0%
5.2%
5.3%
54.4%
44.1%
72.4%
0.0%
56.5%
46.1%
76.6%
0.0%
53.1%
42.7%
77.5%
0.0%
51.3%
40.3%
74.7%
0.0%
48.8%
36.7%
74.6%
0.0%
47.2%
35.0%
74.7%
0.0%
45.8%
34.0%
74.0%
0.0%
45.1%
33.0%
74.3%
0.0%
44.6%
32.5%
74.0%
0.0%
44.2%
32.0%
73.0%
0.0%
11.5%
1.7%
-6.4%
11.7%
11.28%
26.75%
4.5
2.1
-14.9%
9.5%
1.8%
21.5%
13.2%
11.38%
28.02%
1.8
2.1
7.6%
9.1%
2.1%
-1.9%
11.2%
18.26%
31.83%
1.2
2.1
13.4%
8.5%
2.5%
-200.1%
11.6%
14.09%
33.11%
1.3
2.1
21.9%
8.1%
2.6%
32.6%
9.6%
18.60%
35.54%
2.0
2.0
-0.2
-2.5
-2.4
-3.6
-3.2
20.0%
7.5%
2.5%
35.0%
9.6%
17.0%
35.5%
2.00
2.10
-3.30
18.0%
7.3%
2.6%
35.0%
9.5%
16.0%
35.5%
2.20
2.10
-3.60
15.0%
7.0%
2.6%
35.0%
9.3%
15.0%
35.5%
2.20
2.10
-3.70
14.0%
6.8%
2.7%
35.0%
9.2%
16.0%
35.5%
2.20
2.10
-3.50
12.0%
6.8%
2.8%
35.0%
9.0%
16.0%
35.5%
2.20
2.10
-3.20
Discount Rate
CAPITAL STRUCTURE
EQUITY (MKT)
DEBT (BV)
TOTAL
357.91
0
357.91
100.0%
0.0%
100.0%
COST OF EQUITY
CAPM
Risk free rate
beta
Market premium
CAPM
2.5%
1.33
7.0%
11.79%
Realized equity return 5 Yr
39%
Cost of equity
CAPM
Real equity return
Graham g%
Adj cost of equity = WACC
11.8%
39%
9.25
12.5%
WACC
Risk Premium
Discount Rate
Terminal Growth rate
Case Analysis
Base
With International Expansion
12.5%
1%
14%
3%
Case Driver->
<--Drop Down Here
<--Drop Down Here
2
DCF
DCF
2014A
30.1
35%
19.59
4.1
-3.2
EBIT
Tax rate
EBT
Add: Depreciation and Amortization
Less: Capitalization
Less: Increase in NWC
Account receivables
Inventory
Account payables
NWC
Increase in NWC
FCF
Discounted factor
PV
# of outstanding share
Price/share
2015E 2016E
46.0
62.6
35%
35%
29.92 40.67
4.1
4.3
-3.3
-3.6
26.3
24.9
47.6
3.6
38.0
29.3
65.1
2.2
-0.7
42.03
32.62
43.7
31.8
75.2
0.2
-2.0
55.28
37.81
49.2
38.1
84.7
2.6
2.4
60.06
36.19
Terminal
2019E Value
108.3
35%
70.37
4.3
-3.2
53.9
42.3
93.9
2.2
-0.4
71.83
38.14
546.54
31.664
17.26
Sensitivity Analysis
Terminal
Growth Rate
32.1
26.8
56.1
2.9
-0.7
31.43
27.70
2017E 2018E
81.1
94.8
35%
35%
52.69 61.63
4.3
4.3
-3.7
-3.5
Discount Rate
17.26
11.5%
12.5%
13.5%
14.5%
14.4%
2.0%
19.89
17.83
16.13
14.70
14.77
2.5%
20.75
18.50
16.67
15.14
15.22
3.0%
21.71
19.25
17.26
15.62
15.70
3.5%
22.79
20.08
17.91
16.14
16.23
4.0%
24.01
21.00
18.63
16.72
16.80
73.98
374.09
Recommendation
• Current Price: $17.34
• DCF:
• $17.26 Base with International Expansion
• $16.10 Base with limited International Expansion
• Comparable: $14.77
•
Small Cap with growth potential
•
Strong brands
•
Innovation focused, premium products
•
Strong financial condition and historical performance
•
200 Share of NLS @ $16.50
GTC
No Debt, Light Assets, Large Cash on the book
•
Experienced management
•
Possible future acquisition to gain larger market share
•
Low correlation with our other current portfolio companies