To keep things (relatively) simple, assume that NLS just keeps reporting flat earnings of $35 million per year on sales of about 460 million. We're after the stream of cash dividends that the company *could* pay out under those conditions.
Plant The biggest issue is probably capex vs depreciation. Historical average capex for NLS is about 3% of sales. Depreciation is presently running just about 2.4%. If we bump up the depreciation charges to 3%, we have to take 2.75M per year from the reported earnings above. The 3% value came from a period of earnings hypergrowth, so I'd argue that it's a conservative estimate even as product lines change over time.
Checks in the Mail Next, receivable lag has grown from 30 days (Q3'02) to 45 days (Q3'03) and will probably swell up to 60 days as the retail segment grows. The extra 15 days will get sucked permanently into equity so it's effectively a one-time charge against *owner* earnings. 15 days of sales comes to about 17 M. (Silver lining: for the same reason (retail), the inventory held by Nautilus itself has and will probably continue to decrease.)
Diworseification Does Nautilus Group depend on purchase of an endless stream of new brands? No, I don't think so, not to maintain earnings at $1. In fact their existing stable of brands is already helping them expand into retail. Will management just buy things for no reason? Well, I hope not. Something to watch, certainly.
The resulting hypothetical cash flows I get are Y/E 2003: $2 (cash on hand) - $0.50 (cash set aside for swelling of AR) = $1.50 2004: $1 etc: $1.
So I think NLS can maintain their sales and earnings, and fund conservatively-estimated capital spending even if they were required to mail out $1 per year dividends. Probably a good deal for longs (7% of the share price). Probably a bad deal for shorts as I've claimed already.
Growth What if the opportunity arises to grab more sales at the same 7.5% net margin and capex running at 3% of sales? Ignoring additional one-time charges to owner earnings, and assuming they don't acquire any more damn companies, 110 M in sales pays 8.25 M in earnings ($0.25 EPS) while leaving capex funded. We can't grow sales 24% while paying our full dividend. But it won't cost any more than the 32M owner earnings to gear up. So even if we put the entire dividend into non-cash retained earnings, it's possible financially (and historically) to grow 24% in one year. We increase the future earnings stream by 24% less the discount rate -- net 15% or more increase in present value if we accomplish it in just one year; perhaps more like 8-10% if it takes two.