Nautilus (NYSE:NLS), maker of Bowflex fitness equipment, recently announced its first operating profit in 14 quarters, breaking a losing streak that dates all the way back to June 2007. Once upon a time, it could do no wrong and then the bottom fell out. Its stock dropped like a stone from over $40 in 2002 to little more than a buck in 2010. It was bleak indeed. Turnaround specialist Edward Bramson entered the picture in January 2008 and today it appears on the road to recovery. We'll look at why now may be a good time to buy.

IN PICTURES: 8 Tips For Starting Your Own Business

Walk Then Run
Nautilus finished 2010 with total revenues of $168.5 million and an operating loss of $9.6 million. When it was trading above $40 in 2002, revenues were $585 million and operating income $151 million. It was making as much in operating profits as it's generating today in revenues and, as such, it's easy to understand why the stock price cratered. Baby steps are necessary if it wants to return to its heyday of the late 1990s and early 2000s. To get there, it will have to deliver a full-year of profitability, not just one quarter. But it's a start.

What Still Needs Fixing
Management took a giant step in early 2010, when it sold its commercial business in two separate transactions, one for $10.9 million to Xiamen World Gear Sports Goods and the other for $2.8 million to Med-Fit Systems. Despite a net loss on the deals, the move allowed the company to focus on its retail and direct businesses. It's about time. I owned Nautilus stock between 1999 and 2002 and always wondered why it wanted to wade into the highly competitive commercial fitness business. Many have lost their shirts trying to sell to and service fitness clubs. The deal was a case of addition by subtraction. Having said this, it's definitely not out of the woods. While its retail segment delivered revenue and operating profit growth in 2010, its direct segment saw revenues drop 21% to $96.7 million with an operating loss of $10.8 million.

Management has suggested the decline was a result of lower Bowflex sales due to the reduced availability of consumer financing during the first three quarters of 2010. Apparently, financing approvals with General Electric's (NYSE:GE) Money Bank division improved late in the year. This might be true but it won't succeed long-term if it has to rely on financing in order to get consumers to buy its products. Not only that, but its direct segment has to do a much better job on margins. Advertising rates have been lower than historical norms the past couple of years and yet it still couldn't make money from Bowflex. This needs to change.

Future Strategy
Bramson indicated in the Q4 earnings release that it will focus on cardio based products in the future because it's the largest segment of the fitness market. This makes a lot of sense, although I worry the decision seals the fate of Bowflex strength products - once its bread and butter. Future quarters will tell us if this is in fact the case or, more likely, that its growth will come from the Bowflex Treadclimber on the direct side and from ellipticals, stationary bikes and treadmills on the retail side. If the fourth quarter results are any indication, the strategy is working. The direct segment's operating loss was 73% lower in the final quarter of the year on a 2.3% decrease in revenues. A few more positive quarters and the direct segment will also be operating profitably.

Nautilus and Peer Group

Company Market Cap-to-Cash P/S Current Ratio
Nautilus (NYSE:NLS) 6.8 0.51 1.45
Cybex International (Nasdaq:CYBI) 3.3 0.11 2.14
Callaway Golf (NYSE:ELY) 8.7 0.49 3.11
Polaris Industries (NYSE:PII) 7.1 1.37 1.38
Arctic Cat (Nasdaq:ACAT) 2.4 0.53 2.49

Valuation
Nautilus isn't making money at this point, so any discussion about the value of its stock won't revolve around earnings. Instead, we'll look at some other metrics detailed in the above table. Nautilus fares about average in all three categories when compared to four of its peers.

In June 2010, I wrote an article about Polaris and Arctic Cat. At the time, I thought Arctic Cat was the better stock. I still do. In fact, I think it's the best stock of all five. However, this is about Nautilus and so I'll mention two things I think should give you pause before passing on the fitness equipment company.

First, its direct segment had a net margin of 23.6% in 2002 when its stock was trading above $40. Even if it only boosts its operating margin to half the 2002 level, it'll add approximately $21.1M in operating profit. Second, CEO Edward Bramson bought the first 6.2 million of his 10 million shares back in July 2007 at an average cost of more than $9 a share. There is no way he's going to stop until he's got a return on his investment. He's motivated to fix this and I think he can.

Bottom Line
While the first or second quarter could bring bad news, I don't see the stock falling below $2 again. However, if the next two reports bring continued improvement, $9 could be just around corner. The risk is reasonable at this point. (If you don't realize how "big" small-cap stocks can be, you'll miss some good investment opportunities. Check out What Is A Small Cap Stock?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  2. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  3. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  4. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  5. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  6. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  7. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  8. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  9. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  10. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center