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Nautilus Inc. Message Board

  • astral_tsar astral_tsar Jan 16, 2004 12:36 PM Flag

    Value Estimate -- Comments?

    The prospects for future EPS well north of $1 are starting to shape up. Treadclimber and the adjustable barbels and the Schwinn-brand entry-level retail Bowflex may have been risky bets six or twelve months ago (at least in the eyes of skeptics), but now those products are gaining "traction" very fast. Recall what NLS/Direct Focus did with Bowflex: 50% plus earnings growth for more than eight years running. These guys are unmatched marketing pros once their products catch on in a new market.

    So I think it's time to update the value scenarios. I've put in a conservative risk-free discount rate of 6.25%. I'll handle risk by looking at the probability of each scenario.

    Happy Scenario: Moderate Growth
    $1.00 EPS in 2004, reinvested to grow earnings 20% annually for five years, will reach $2.50 per share at y/e 2008. Present value of $2.50 per year beginning in 2008: $2.50/6.25%/(1.0625^5) =
    Intrinsic vlaue per share:
    $29 and change.

    Medium Scenario: No growth
    $1 EPS in 2004+
    At a discount rate of 6.25%, that's $16 (+ $2 cash):
    Intrinsic value per share:

    Gloomy Scenario: Shrinkage
    Of course nobody thinks this is very likely right now, but better safe than sorry.
    $0.50 EPS in 2004+
    At a discount rate of 6.25%, that's $8 (+ $2 cash):
    Intrinsic value per share:

    I don't know how to estimate the probabilities of these three cases, so let's just average them together:

    Expected intrinsic value:
    ($29 + $18 + $10)/3 = $19 per share

    And, to my mind, the probability of the "Happy" case should have been higher than 1/3 at the expense of the "Gloomy" case. But we still get a similar intrinsic value estimate:

    40%*$29 + 35%*$18 + 25%*$10 = $20.40 per share.

    Even if we're paranoid and reverse those probabilities, betting more on a long-term reversal, we get

    25%*$29 + 35%*$18 + 40%*10 = $17.55. per share.

    The typical 2003 share price looks like the average of the "Medium" and "Gloomy" cases:

    50%*$18 + 50%*$10 = $28/2 = $14.

    Well, fine, we all did feel kinda gloomy last year. But at $15 per share, shareholders get a shot at that upside, say a 1/3 chance at $15 additional value per share, for only $1 over and above the no-upside share value.

    Comments, anybody?

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    • Can't shoot that down; my post was just my own assumptions & picture, no special crystal ball.

      I wouldn't want to be Nautilus' competitors, I'll tell ya that.

    • ericvann --
      FWIW I think that both have had an impact and that competition really was the bigger factor.

      I think improving consumer sentiment coupled with Nautilus' fast and effective response to retail competition will quickly restore revenues to the over-600-million level. So yeah, I view a slice of the 2003 earnings dip as an immaterial "blip".

      But I think that competition was a larger and permanent change. Not nearly the world-shattering disaster that the shorts claimed, but it sets them back. Nautilus can easily and profitably compete with visibly crappy knock-off Bowflexes in the retail stores ... but it knocks their prices down. They can't switch off the low end anymore. The $1600 Bowflex Emasculator is not gonna determine the net margin anymore.

      Just to give the picture, here's my own crude "most likely" forecast:

      2002 revenues: $585M
      2003 revenues: $460M (glitch: fugeddaboudit)
      2004+ revenues: $600M+ & growing

      2002 net margin: 17%
      2003 net margin: 8%
      2004+ net margin: 8% (competition: live with it)

      Calculated from rev*margin above:
      2002 earnings: $99M....eps: $2.70 (diluted)
      2003 earnings: $37M....eps: $1.13 (options sumberged)
      2004 earnings: $48M...eps: $1.35 (diluted)
      2005+ dunno, but steady at $1.40 not a bad bet

      So in my view, a dollar or more of the earnings hit was "permanent" in the sense that the company now needs twice the revenues to get back to $2.50 per share, and the ROE available to fund that growth internally is also cut from 40% to 20% (after dividends, 12%).

      Anyway I think the competition whining was on target: cost cutting has made life less profitable for the Flex.

    • <I think that bears may still be overreacting just a bit to one year of low earnings -- a year when most folks selling to consumers have had similar problems>

      I suspect you're right. I had a similar view when I was long NLS, but it put me right off when management started whining about "competitive pressures" rather than consumer sentiment, which likely was the real problem. Caused me to sell at a substantial loss. Fortunately, I've done very well since by paying more attention to P/B etc. and virtually ignoring growth estimates.

    • Prez!!! lol, welcome aboard dude.

      Hint: If you're gonna dog somebody around the boards, at least make it interesting. For heaven's sake don't keep using that cheesy "last word" line under different aliases.

    • Tell you what, after this note inevitably pitying me and my stupidity, I won't respond. That way you get the last word.

      Anyone ever tell you that you don't have much of a sense of humor?

    • "Rather ironic that someone so in love with rigourous financial analysis would make such bold presumptions about when I got into NLS without any facts."

      Whoooaaaa there, Bessie! One silly hair-splitting argument at a time! Your complaint was about how you "live here" on the board. I said, well, ok but as a regular I never saw you before.

      How are we suddenly talking about how long you've held the stock?

    • Hey the guys an asshole , probably the biggest on the board . Once in awhile he has something relevant and of minor value but in the whole he's a jerk . No use to even care he's very small ,SYD is correct !!actually I believe he is actually the Big A or a close relative .

    • Sorry, guy, there's a big difference between analysis and blowing smoke. I don't pick on you for not knowing the difference; you shouldn't pick on me for knowing.

      It's fascinating, though, the size of the group you suddenly represent. bpbiv, philchann and you all have made the same point: you believe that wrong and broken fundamentals are just as valuable as the real thing. So all "three" of you just appeared out of nowhere in the same week and expressed the same view in the same argument.

      Excuse me if I hesitate before entering you as three different individuals in the ole Demographics.

      Good luck guy(s)!

    • Rather ironic that someone so in love with rigourous financial analysis would make such bold presumptions about when I got into NLS without any facts. Maybe there's a lesson to be learned here; if you make assessments based on faulty data, your results will be faulty. Or as one of the other posters so succinctly put it, garbage in, garbage out. I have been invested in NLS for some time. I am sure neither my position is as BIG as yours, nor did I buy as LOW as you did. But I am as entitled to post and comment on this board as you are.

      Secondly, I do "analysis" was right there in the remember, fundamentals like revenues, market share, management quality, distribution channels...

      And one final comment; don't tell me nothing personal...the whole reason the original discussion went off the rails was because you took the other guy's comments as offensively as possible and not in what - I suspect - was the spirit of his message; let's discuss and learn from each other.

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