Nautilus Slims Down - Time to Sell

Nautilus (NLS), the maker of the well-known Bowflex line of fitness products, reported terrible second quarter results Monday evening with both revenue and earnings coming in below expectation. Barring a one time gain due to a litigation settlement, the company actually lost $9.5 million or 30 cents a share. The bad news did not end there as the company now expects to earn only between 20 to 30 cents in the second half of 2007, less than half what it earned in the second half of 2006 and well below analyst estimates of 74 cents over the same time period.

With housing showing no signs of improvement and the other divisions of Nautilus not picking up the slack from low fitness equipment sales, the outlook for 2008 may not be encouraging either. Four analysts who had ratings of buy to outperform on the stock have now downgraded the stock and while unfortunate, I believe it is best to sell this stock both in my model portfolio and personal portfolio. As long time readers are aware, Nautilus almost made the cut numerous times but I finally pulled the trigger and bought the stock last month after it had dropped a lot. Unfortunately I pulled the trigger a little too soon and now have a loss of roughly 20% to show for it.

As a long-term investor, I should stick it out with Nautilus but with the lowered outlook, the stock is expensive even at these levels. The company made 8 cents a share last quarter and 4 cents this quarter. Based on the second half outlook, a price of $10/share and not taking stock buybacks into account, the P/E for 2007 would work out to between 24 and 32. Despite the high dividend yield, I think it is best to sell Nautilus at this point as I believe the stock is either heading lower or is likely to stay flat for the foreseeable future.

I used the closing price yesterday as the selling price for Nautilus in my model portfolio.

NLS 1-yr chart