Seeking Alpha • Oct 01
Nautilus: Buy For The Potential Buyout? Meh
Summary
Nautilus recently announced that it was exploring strategic alternatives, including a potential sale of the entire company.
As the company continues to lose ground and move into a deeper unhealthy financial position, the risks associated with an acquisition falling through are greater than M&A arbitrage, I believe.
As a result, even if a purely speculative position may be okay, I don't believe the risk-reward profile fits a traditional M&A arbitrage and will not be holding a position.
Earlier this month, Nautilus (NLS) announced that its board was discussing the potential sale of the company as part of them exploring strategic alternatives. While this way forward makes sense to me given the OPC (one product company) nature of the company, the real question is at what premium to their current share price, if at all, is this potential transaction going to take place?
Let's explore the company and try to get a sense of that.
Declining Company Fundamentals
While the company's products are sound, they lack the hype factor of companies like Peloton (PTON), which caused them some headaches when trying to market the products to gyms and for personal use.
Unsurprisingly, the company saw a surge in sales during the pandemic as a good chunk of the world remained locked down in one way or another and many sought out alternatives to gyms, which were mostly closed. The company's revenues surged from $309 million in 2019 to almost $665 million in 2021, more than doubling over a period of just 2 years.
Since then, however, the company's sales have been declining as they both are unable to find that comparative growth, like most other companies in the field, as well as losing ground in services, or the 'interactive' part of their products to companies like Peloton and other private companies.
In 2022, the company reported a decline in sales to just shy of $590 million and their current projections for the upcoming fiscal year call for a decline of almost 33% to $397 million and then a 9% increase in the following year to $434 million.
Margins Not Too Hot Either
With great pandemic-sales power, comes great operational expenses responsibilities. And with that higher sales volume came higher operational expenses, which rose from just over $100 million annually to over $160 million annually. This has, along with the slightly higher cost of revenues, caused the company to report a loss for fiscal 2022, and that loss is expected to deepen dramatically in the coming fiscal year.
After reporting EPS of $2.67 in the year with record revenues, the company reported a loss of $(0.72) in the last fiscal year and is expected to report a much deeper loss this coming year. Based on the same analyst projections, the company is expected to report an EPS loss of $(2.56) for the coming fiscal year, followed by a 75% rise the following year, to a loss of $(0.68).
But it's not like the company has some cash reserves to fall back on to maintain operational efficiency or fund operations through an acquisition.
Low Cash, High Debt
The company currently has one of its lowest ever cash positions at just $7.3 million in cash and equivalents, no short-term investment to divest from and no trading asset securities like previous years to generate any meaningful interest income.
On top of that, they have one of their highest ever long-term debt position at $34.7 million, on which they are paying more than $1.6 million annually as interest rates rise in the United States and around the world as inflation runs relatively high.
This means that the company will have to either fund operations in the coming few years through issuing more debt, making a buyout less appealing, or making equity offerings, which will further dilute shareholder value and subsequently lower the price per share of a buyout offer, if one may come.
Buyout Opportunity - I Just Don't Know
Given the fact that Nautilus is an established company with relationships with vendors and manufacturing facilities, it's clear that they CAN be a valuable asset to a private equity company that owns fitness gyms or has some fitness portfolio. I'm not so sure about a public company buyout like Peloton or others, since there's little incentive for that to happen.
With the company's $100 million in inventory and still-solid $400 million range revenues projection for the coming year, there is certainly an incentive for someone who can significantly lower the costs of Nautilus and thus generate some profits in the coming year. But at what price?
Earlier last year, apparel company Lululemon (LULU) announced it was buying Mirror, a home fitness company, for $500 million as part of its investment in overall fitness markets to expand its reach and avenues to sell their clothing. While I don't think Nautilus will fit their brand, other companies which are hurting from the volatility, which is the apparel and fitness markets, can benefit from having subscription-based services companies and hardware companies in their portfolio.
While I'm not going to name names, it's clear that there is a market present for buyers for Nautilus, whether it be athletic companies, athletic apparel companies or private equity with fitness portfolios looking to enhance their reach.
Is It Worth A Speculative Buy?
It's hard to set a value on the company's worth to a buyer without knowing the portfolio they're trying to expand, but with a book value hovering around $3 per share and an enterprise value of around $100 million, the highest possible potential value the company has is probably around double where it is now.
However, there's going to be a discount for the company given their higher debt load as a percentage of the value as well as the fact they're not expected to make anything resembling a profit for quite some time.