Post on 17-Jan-2016
NAUTILUS Inc.By: Roman Fan, Jeffery Li, Yifan Liu, Siyu XuPresented 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%
Piotroski Score>=6Altman Z Score>6
Among 7 companies, choose NLS (Strong growth
in Revenue and Profit)
Introduction - Nautilus Inc.
• Consumer fitness equipment company• Designing, Developing, Sourcing and Marketing high-quality
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
• 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
• Sport Authority, Dick’s Sporting Good, Walmart, and Academy
• Gross Margin: 25.4%Source: Nautilus 2014 - 10K
Direct64%
Retail34%
Royalty2%
Cardio79%
Strength19%
Royalty2%
U.S.84%
Canada13%
Others3%
Nautilus Inc. – Designing & Developing
Source: Nautilus Presentation at 2015 ROTH Conference
In- depth Consumer Research
Ground Up Design
Rigorous Equipment
Testing
Fitness Result
Validation
Continual Consumer Feedback
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 manufacturersSource: 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
Source: Nautilus Presentation at 2015 ROTH Conference
• 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
• Highly dependent on a few retailers
• Require continuity in technology development and patent holding
• Maintain a sustainable media planning
• Credit approval rate reliance
• Premium sporting equipment • International market
penetration
• Third-party credit approval rate rised
Macroeconomics
Source: Ken Research Private Limited
Increasing Health
Consciousness
Increasing Purchasing
Power
Spur Demand for Sporting Goods and Equipment
Potential Growth in International Market
Source: Nautilus Presentation at 2015 ROTH Conference
North America
• Mature market
• 3.5% annual growth
• Market 3.6B
EMEA
• Mature Market
• 3% annual growth
• Market 3B
Asia Pacific
• Emerging market
• >15% annual growth
• Market 1.18B
Latin America
• Emerging market
• 10% annual growth
• Market 0.4B
Nautilus Inc. – Industry Analysis
Source: US Census Bureau data on Statista
U.S. online shop and mail-order sales of sporting goods from 2003 to 2013
Rising trend on online shopping of sporting goods
Nautilus Inc. – Industry Analysis
Source: National Sporting Goods Association data on Statista
Distribution of sporting goods purchases by category in the U.S. in 2012
Equipment: highest spending among sporting goods
Nautilus Inc. – Industry Analysis
Source: National Sporting Goods Association data on Statista
Sports equipment by average price in the U.S. in 2013 (in U.S. dollars)
House gym products pricing ranks higher among sports equipmentNLS’s products are at a relative higher price point compared to average
Nautilus Inc. – Industry Analysis
Source: National Sporting Goods Association data on Statista
Average retail price of elliptical/cross-trainers in the U.S. from 2007 to 2013
Average Product Price = $600Price is relatively Stable
Nautilus Inc. – Industry Analysis
Source: IBISWorld Gym & Exercise Equipment Manufacturing in the US
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.
Nautilus Inc. – Industry Analysis
Source: IBISWORLD - Gym & Exercise Equipment Manufacturing in the US
Cardiovascular equipment: Including treadmills, exercise bikes or stair steppersPopular 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
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 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
Company Name
Johnson Health Tech Co., Ltd. (TSEC:1736)
Star Fitness S.A. (WSE:SFI)
Brunswick Corporation (NYSE:BC)
Amer Sports Corp. (HLSE:AMEAS)
ICON Health & Fitness, Inc.
American Telecast Products, LLC
Life Fitness, Inc. ( Conso in BC)
Cyber International Corp
Fitness Quest Inc.
Public
Private
Comparable Analysis
Weights
Johnson Health Tech Co., Ltd. (TSEC:1736) 40%Star Fitness S.A. (WSE:SFI) 10%Brunswick Corporation (NYSE:BC) 30%Amer Sports Corp. (HLSE:AMEAS) 20%
Weight Average Multiples TEV/ Revenues 1.4xTEV/EBITDA 13.5xTEV/EBIT 17.0xP/E 23.7xP/B 5.0x
Weight Average Multiples
Multiples NLS Data
TEV/ Revenues 1.4x Revenue $274.40 TEV/EBITDA 13.5x EBITDA $34.20 TEV/EBIT 17.0x EBIT $30.20 P/E 23.7x EPS $0.64 P/B 5.0x TABG BV $98.60
Valuation TEV/ Revenues $12.11 20%TEV/EBITDA $14.65 30%TEV/EBIT $16.28 30%P/E $15.16 10%P/B $15.59 10%Price $14.77
Financial Analysis
2010A 2011A 2012A 2013A 2014A (10.0%)
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Margin
Gross Margin % Operating margin
2010A 2011A 2012A 2013A 2014A
(100.0%)
(80.0%)
(60.0%)
(40.0%)
(20.0%)
0.0%
20.0%
40.0%
60.0%
Profitability
Return on Assets % Return on Equity %
2010A 2011A 2012A 2013A 2014A0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
(30.0)
(25.0)
(20.0)
(15.0)
(10.0)
(5.0)
0
Liquidity
Avg. Cash Conversion Cycle Current Ratio Quick Ratio
2010A 2011A 2012A 2013A 2014A 0.0%
10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0
Solvency
Altman Z score Total Debt/Asset Total Liabilities/Total Assets
Financial Analysis
2010A 2011A 2012A 2013A 2014A
-150.0%-100.0%
-50.0%0.0%
50.0%100.0%150.0%200.0%250.0%
-50.0%-40.0%-30.0%-20.0%-10.0%0.0%10.0%20.0%30.0%
Greenblatt
EBIT/(NWC+Fixed assets) EBIT/(mkt value of equity+debt)
DuPont Analysis
2010A 2011A 2012A 2013A 2014A
Tax Burden=net income/EBT 247.8% 44.6% 162.1% 299.0% 62.2%
Interest Burden=EBT/EBIT 95.8% 88.6% 94.9% 102.0% 100.2%
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
ROE -74.0% 4.4% 39.0% 52.4% 16.9%
Asset Turnover Without Cash* 2.63 2.76 2.73 2.13 2.65
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 2010A 2010A 2010A 2010A 2010A 2015E 2016E 2017E 2018E 2019E
Revenue 7.1% 7.5% 12.8% 25.4% 21.9% 19.7% 17.4% 13.8% 12.0%
Direct 10.8% 16.7% 9.3% 28.5% 25.8% 22.6% 18.6% 14.1% 11.4%
Cardio products(1) 39.6% 32.5% 14.1% 39.5% 30.0% 25.0% 20.0% 15.0% 12.0%
Strength products(2) - 26.5% - 21.8% - 10.2% - 29.7% - 18.0% - 18.0% - 18.0% - 18.0% - 18.0%
Retail 1.2% - 6.9% 20.2% 21.4% 15.5% 14.5% 15.4% 13.3% 13.6%
Cardio products(1) 0.2% - 17.2% 1.3% 53.3% 20.0% 10.0% 15.0% 15.0% 10.0%
Strength products(2) 2.9% 11.3% 44.8% - 7.8% - 5.0% 5.0% - 5.0% - 7.0% 2.0%
Royalty 19.2% 6.2% 6.1% 4.6% 5.5% 5.2% 5.0% 5.2% 5.3%Cost of sales % of RevCOGS 54.4% 56.5% 53.1% 51.3% 48.8% 47.2% 45.8% 45.1% 44.6% 44.2%
Direct 44.1% 46.1% 42.7% 40.3% 36.7% 35.0% 34.0% 33.0% 32.5% 32.0%
Retail 72.4% 76.6% 77.5% 74.7% 74.6% 74.7% 74.0% 74.3% 74.0% 73.0%Royalty 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Other accountsSelling and marketing of sales yoy growth - 14.9% 7.6% 13.4% 21.9% 20.0% 18.0% 15.0% 14.0% 12.0%
General and administration of sales 11.5% 9.5% 9.1% 8.5% 8.1% 7.5% 7.3% 7.0% 6.8% 6.8%
R&D of revenue 1.7% 1.8% 2.1% 2.5% 2.6% 2.5% 2.6% 2.6% 2.7% 2.8%
tax rate of pre- tax rate - 6.4% 21.5% - 1.9% - 200.1% 32.6% 35.0% 35.0% 35.0% 35.0% 35.0%Account Receivables as % of Rev 11.7% 13.2% 11.2% 11.6% 9.6% 9.6% 9.5% 9.3% 9.2% 9.0%Inventory as % of COGS 11.28% 11.38% 18.26% 14.09% 18.60% 17.0% 16.0% 15.0% 16.0% 16.0%Accounts payable of COGS 26.75% 28.02% 31.83% 33.11% 35.54% 35.5% 35.5% 35.5% 35.5% 35.5%Depreciation 4.5 1.8 1.2 1.3 2.0 2.00 2.20 2.20 2.20 2.20Amort. of other Intangibles 2.1 2.1 2.1 2.1 2.0 2.10 2.10 2.10 2.10 2.10Capital Expenditure - 0.2 - 2.5 - 2.4 - 3.6 - 3.2 - 3.30 - 3.60 - 3.70 - 3.50 - 3.20
Discount RateCAPITAL STRUCTURE
EQUITY (MKT) 357.91 100.0%DEBT (BV) 0 0.0%TOTAL 357.91 100.0%
COST OF EQUITYCAPM Risk free rate 2.5%beta 1.33Market premium 7.0%CAPM 11.79% Realized equity return 5 Yr 39% Cost of equity CAPM 11.8%Real equity return 39%Graham g% 9.25Adj cost of equity = WACC 12.5% WACC 12.5%
Risk Premium 1%Discount Rate 14%
Terminal Growth rate 3%
Case Analysis Case Driver-> 2Base <--Drop Down Here With International Expansion <--Drop Down Here
DCF
Sensitivity Analysis Discount Rate
17.26 11.5% 12.5% 13.5% 14.5% 14.4%
Terminal Growth Rate
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
DCF
2014A 2015E 2016E 2017E 2018E 2019ETerminal Value
EBIT 30.1 46.0 62.6 81.1 94.8 108.3 Tax rate 35% 35% 35% 35% 35% 35% EBT 19.59 29.92 40.67 52.69 61.63 70.37 Add: Depreciation and Amortization 4.1 4.1 4.3 4.3 4.3 4.3 Less: Capitalization -3.2 -3.3 -3.6 -3.7 -3.5 -3.2 Less: Increase in NWC Account receivables 26.3 32.1 38.0 43.7 49.2 53.9 Inventory 24.9 26.8 29.3 31.8 38.1 42.3 Account payables 47.6 56.1 65.1 75.2 84.7 93.9 NWC 3.6 2.9 2.2 0.2 2.6 2.2 Increase in NWC -0.7 -0.7 -2.0 2.4 -0.4 FCF 31.43 42.03 55.28 60.06 71.83 73.98Discounted factor 27.70 32.62 37.81 36.19 38.14 374.09PV 546.54 # of outstanding share 31.664 Price/share 17.26
Recommendation
• Current Price: $17.34
• DCF: • $17.26 Base with International Expansion• $16.10 Base with limited International Expansion
• Comparable: $14.77 BUY!200 Share of NLS @ $16.50
GTC
• Small Cap with growth potential
• Strong brands
• Innovation focused, premium products
• Strong financial condition and historical performance
• 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