Nautilus: buying for the potential takeover? Meh (NYSE:NLS)

Justin Paget/DigitalVision via Getty Images

Earlier this month, Nautilus (NYSE: NLS) announced that its board of directors was discussing the potential sale of the company as part of the exploration of strategic alternatives. Although this way forward makes sense to me given the OPC (one product company), the real question is at what premium to the current share price, if any, will this potential transaction take place?

Let’s explore the company and try to get an idea of ​​it.

Business fundamentals in decline

Although the company’s products are strong, they lack the hype factor of companies like Peloton (PTON), which caused them headaches when trying to market the products in the gyms and for personal use.

Unsurprisingly, the company saw sales increase during the pandemic as much of the world remained locked down in one way or another and many sought alternatives to gyms, which were mostly closed. The company’s revenues have grown from $309 million in 2019 to nearly $665 million in 2021, more than doubling over a period of just 2 years.

Since then, however, the company’s sales have declined as they are both unable to find this comparative growth, like most other companies in the field, as well as losing ground in services or the “interactive” part. of their products for the benefit of companies like Peloton and other private companies.

In 2022, the company reported a drop in sales to just under $590 million and its current projections for the coming fiscal year call for a decline of nearly 33% to $397 million and then an increase of 9 % the following year to $434 million.

Margins not too hot either

With great pandemic selling power comes great operational expense responsibility. And with that higher sales volume came higher operating expenses, which grew from just over $100 million per year to over $160 million per year. That, combined with the slightly higher cost of revenue, caused the company to report a loss for fiscal 2022, and that loss is expected to worsen significantly in the coming fiscal year.

After reporting EPS of $2.67 in the year with record revenue, the company reported a loss of $(0.72) in the last fiscal year and is expected to report a much larger loss in the year. next. Based on the same analyst projections, the company is expected to post an EPS loss of $(2.56) for the coming year, followed by a 75% increase the following year, for a loss of ( $0.68).

But it’s not like the company has 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 cash positions at just $7.3 million in cash and cash equivalents, no short-term investments to dispose of, and no trading asset securities as in previous years to generate income. significant interests.

On top of that, they have one of their highest long-term debts at $34.7 million, on which they are paying more than $1.6 million a year as interest rates rise in the United States and around the world when inflation is relatively high.

This means that the company will either have to finance its operations over the next few years by issuing more debt, making a buyout less attractive, or making equity offerings, which will further dilute shareholder value and subsequently reduce the price. per share of a buyout offer, if anyone can come.

Buyout Opportunity – I don’t know

Since Nautilus is an established company with relationships with suppliers and manufacturing facilities, it is clear that they CAN be a valuable asset to a private equity firm that owns gyms or has a fitness portfolio. . I’m not so sure about buying a public company like Peloton or others because there’s little incentive for that to happen.

With the company’s $100 million in inventory and still strong revenue projections of $400 million for the coming year, there’s certainly an incentive for someone who can significantly reduce Nautilus’ costs and thereby generating profits in the coming year. But at what cost ?

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 global fitness markets to expand its reach and opportunities to sell their clothes. While I don’t think Nautilus is a good fit for their brand, other businesses that suffer from volatility, namely the apparel and fitness markets, can benefit from the presence of subscription service companies and material in their portfolio.

Although I won’t name names, it’s clear that there is a market for Nautilus buyers, whether it’s sports, sportswear or private equity companies with portfolios of fitness looking to improve their reach.

Is it worth a speculative purchase?

It’s hard to put a value on enterprise value for a buyer without knowing the portfolio they’re trying to expand, but with book value hovering around $3 per share and enterprise value of around $100 million, the highest possible potential value the company has is probably around double what it is now.

However, there will be a discount for the company given its higher leverage as a percentage of value as well as the fact that it is unlikely to make anything resembling a profit for some time.

While the company’s current EV/sales, a common multiple used to price potential acquisitions, is relatively low at 0.3x, compared to 1x industry-wide, I can’t believe a such a premium to their current price per share will be present in any potential offer.

Even so, a 20% to 50% premium to the company’s current stock price may seem attractive, but that is in the realm of speculation at this point, and I am not convinced that the risks to which the society faces are worth it.

Conclusion – It’s a draw

And I don’t like coin tossing. While I can take a small stance, this will be more of a bet than a strategic thinking behind a potential M&A swap. The company faces far too many hurdles in its operations not to worry about missing its sales forecast, however low it may be, as people do everything they can to get out of the house and into gymnasiums after being locked down. for most of 2020 and 2021.

Any failure in expectations can cause the stock price to plunge and further alienate any potential buyers. That’s why I remain bearish on the company’s near-term outlook and don’t believe that, in the company’s current financial situation, it’s not worth full business consideration of mergers and acquisitions.

Comments are closed.