Nautilus: A Choppy Stock Price Belies The Bedrock Beneath

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About: Nautilus, Inc. (NLS)
by: Underanalyzed Equities
Summary

Strong brands allow Nautilus to continually build its modest market share.

The stock has been hit hard in recent years and has taken dip after dip in recent months but largely trends upwards amidst all of the turmoil.

With advertising shifting to the web, Nautilus continues to invest in 30+ web properties, thereby strengthening its brands.

Nautilus (NYSE:NLS) is one of the strongest companies in the exercise industry, lead by its flagship brands: Boflex and Schwinn. With their many flavors of exercise equipment and valuable brands, Nautilus has distinguished itself and has commanded premium pricing power.

Direct and retail sales represent about an even split with 56% of Nautilus' 2015 business being direct. Direct sales materialize from television advertisements and internet marketing directly targeting the consumer.

The strength of a brand can often be tracked by the popularity of their web properties. Nautilus drew some 18 million visitors last year, many of whom had their credit cards ready. In recent years, the company has seen impressive revenue growth, especially in the last two years (25.4% in 2014 and 22.3% in 2015). This revenue growth has materialized into stronger profitability and higher cash flow.

The North American retail market for exercise equipment is a $3.8 billion industry and Nautilus has ample opportunity for growth, having only captured a mere 3% thus far. Whether it's at the gym or in their own homes, people are in search of the latest and greatest equipment to assist them in their exercise pursuits. A full 60% of 2015's revenue was derived from products launched within the last three years. Nautilus pours millions into continual innovation with $9.9 million being spent in 2015 .

There are further opportunities for international sales and overall company growth. While North America represents the largest market for exercise equipment of this variety, it only accounts for 50% of the total market.

The acquisition of Octane fitness in 2015 for $115 million represents a step towards keeping a position of strength in the cardio market. 82% of 2015 sales were of cardio equipment and Octane specializes in such equipment, complementing Nautilus' portfolio.

The targeted operating metrics that Nautilus projects include a continual 10-12% growth rate, which is reasonable, given their ability to double that rate in recent years.

Management continues to make good use of capital through reinvestment into the company by way of product innovations, acquiring companies with attractive IP portfolios, and buybacks. $10 million was deployed in Q1 of 2016 for said buybacks.

It appears that a brand moat within the exercise industry has served Nautilus well in the past and continues to do so. If you look at their stock history, the company's stock took a pummeling, but has risen considerably over the last half decade, handsomely rewarding those that stuck with it during a period when it had a market capitalization of less than $50 million. While an investment today may not match the spectacular, 10-bagger growth that the last couple of years has shown, there is still ample opportunity to share in the appreciation of a quality stock with strong brands that is poised for continued growth.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.