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Nautilus Inc. Message Board

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  • astral_tsar astral_tsar May 4, 2005 1:47 PM Flag

    They are doing EXACTLY the right thing.

    I can sympathize with your desire to be positive about the stock. But lemme explain my complaint about a $27 buyback from what I think is the shareholder point of view.

    Cash is about $3 per share. So at $27 the market is valuing future EPS at $24. If NLS spends the $3, it can buy back say $3/$27 = 11% of the shares, boosting future EPS by 12.5%.

    If the market is right to value future EPS at $24, this is an even trade: 112.5% of $24 is $27 again. (The cash will be gone.) If future EPS is worth more than $24 in present value, then the buyback was a good move. If future EPS is worth less than $24, then the buyback was a bad move.

    But $24 is 24x what the company has earned for the past couple of years. The present value of $1 per year going out is definitely less than $24. Considering equity risk, it's probably worth more like $12 to $14. So considerable earnings growth is priced into the buyback price. If that growth doesn't happen, then the company would have done better paying a dividend.

    Looking at it another way, if you got a $3 per share dividend, would you use it to buy more shares of NLS at $27 and hold those shares for the long term? Or could you do better, perhaps on recent Buffett purchase Anheuser-Busch?

    As we approach the share prices at which shorts made (well, could have made :-) a killing, it's worth wondering about overpayment risk.

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    • The only sympathy that you need to have for me is that I got out before today's run... I did make money though, which is the name of the game.

      What you are explaining could be said for companies in a hell of a lot worse condition than NLS. As I remember it, I calculated $27 as being the target about a month ago to equal the 10 year annualized 4.25% gain in the Treasury market... Looks like the NLS horse won that race.

      The company made NO promises to buy back the shares, merely an authorization that will expire 3 years from now. That doesn't mean that they will pay $27. So this is not like they've leveraged themselves out of other possibilities.

      What you are suggesting in preference is doing what MSFT and a number of other companies did, which ultimately leaves the balance sheet vulnerable.

      The company added over 20 million (the exact number escapes me at the moment) to their cash reserves in the last quarter, which is not historically their strongest quarter. That cash, combined with higher short term interest rates provide even more possibilities for management

      The market is a discount mechanism... the discount here is that earnings growth is not only robust, but is accelerating. Might the reason that you do not see the value here is because it is no longer a value play, but rather a growth story?

    • I agree that 27 is not a compelling level to buy back the shares at. But I can live with that. After all, there may well be considerable intangible value in the brand plus demographics, as the resurgent direct sales with fat margins has amply demonstrated. It does have a moat!
      Competing use of my cash? Well, interestingly I have also bought the BUD recently. But I don't view it as competing as much as complimentary. It has a different risk profile.

      • 1 Reply to philchan1
      • Yes, BUD is looking good. A lot more solid than your boy Freddie, if you want my honest opinion.

        Nautilus and AB compete for cash only in the sense that if you buy 1000 shares of NLS, you can't also invest that same $27,000 in BUD. So when you call them "complimentary," the middle manager in me wants to cheer: "Great positive thinking! Leverage that synergy! Go team!" ... but the individual investor in me grumbles "nice dodge."

 
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14.74+0.16(+1.10%)Dec 26 4:04 PMEST

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