Nautilus: Ample Cash And Back Half Catalysts Make For Attractive Risk/Reward

| About: Nautilus, Inc. (NLS)

I believe shares of fitness equipment company Nautilus (NLS) offer an attractive risk/reward. NLS boasts a solid balance sheet with $0.66/share in cash (20% of its market cap), no debt, and $79 million in NOL carryovers. NLS has staged an impressive turnaround driven by improvements in its Direct segment (60% of total revenue), where sales and profits grew by 12% and 38% in Q1. This helped fuel Q1 EPS growth of 60%. While Q2 is a seasonally weak quarter, growth should accelerate in the back half of 2012 driven by incremental pricing and TV advertising for its new CoreBody Reformer product. This could result in an upward bias to street estimates of $0.26. With shares trading at only 9x EPS ex cash, valuation looks compelling.

Solid Balance Sheet Following Restructuring. Since 2006, Nautilus has successfully improved its financial position by selling its unprofitable commercial businesses, paying down nearly $80 million in debt, and refocusing on the consumer market. In 2011, Nautilus achieved its first profitable year since 2006. Today, the company is debt-free with $20.4 million in cash, or $0.66/share. Impressively, this is up from its Q4 net cash position of $0.38/share, owing to solid cash generation in Q1. Further, NLS has $79 million in federal net operating loss carryovers, which should keep a lid on tax expense as profits improve going forward.

Q1 Results Were Impressive. Nautilus reported solid Q1 results, with EPS of 0.08 up 60% year-over-year and ahead of street estimates. Results are being driven by its Direct segment, where sales and profits increased 12% and 38%, respectively. The business is benefiting from successful marketing and improved credit conditions, with credit approvals now at 30% compared to 21% last year.

Catalysts In The Back Half Of 2012. Starting in Q3, NLS's Direct segment should benefit from incremental price and the rollout of TV advertising for its CoreBody Reformer product. Management did not offer the specific price increase, but mentioned it would be in excess of cost inflation. The TV advertising will be a first for the CoreBody Reformer, a yoga-inspired product that was successfully introduced through online marketing mediums. Importantly, the CoreBody Reformer has received a number of positive independent reviews. Management believes that Direct's sales and margins should improve on a year-over-year basis throughout the remainder of the year. Further, NLS mentioned that its Retail segment (38% of revenue) sales growth will be back half weighted, similar to 2011, and slightly positive for the year. Importantly, I believe the aforementioned back half growth could result in an upward bias to street estimates of $0.26. With shares trading at only 9x EPS ex cash, NLS offers investors a compelling risk/reward.

Disclosure: I am long NLS.

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