Nautilus (NLS) Needs An Activist


  • Nautilus is a potential activist play.

  • Activist involvement in Nautilus could unlock value.

  • I believe it's likely that Nautilus will sell some of its business lines as part of completing an operational turnaround.

Activist investing comes in many flavors. After an activist investor gets one or more shareholder representatives on the board of directors, those board members may lead the board in selling the entire company. Alternatively, those board members may lead the charge for a long-term operational turnaround using a leadership or consulting methodology such as Tribal Leadership which has been used by many companies and was recently highlighted in Business Insider.

Some of the best activist investments utilize a combination of these initiatives. A hypothetical example could include, transforming the organizational culture, selling off certain lines of business for cash and then using that resulting cash inflow to buyback undervalued stock and/or to reinvest in remaining business units.

There is no one size fits all solution. The best activist investors carefully evaluate board candidates and choose the right candidates for the job. In addition, these activists will get those board candidates on the board which is a different game into of itself. Usually, activist investors have to start the proxy battle process, and at some point in the process, the incumbent board will realize they are heading for an election defeat and settle. But sometimes the incumbent board members refuse to settle and the process goes to a vote. If the activist has selected the right target and has run the election campaign the right way, the end result is a victory for the activist and his or her respective choice of board members get onto the board.

The new board members selected by the activist need to take their time and carefully analyze all of the possible options for the company going forward. I believe one of the potentially most promising activist targets today is Nautilus (NLS). Nautilus stock is down from around $25 a share to around $2 a share today. Needless to say, with this dismal performance, most Nautilus shareholders are ready for change. There appears to be a number of avenues of value creation available to newly elected activist board members. The brand names that Nautilus owns still have real value, and are among the most recognizable worldwide in the fitness equipment space. A Chinese manufacturer of fitness equipment, for example, might be willing to pay a substantial price to own those brand names.

As of today, Nautilus is trading for an EV/Revenue of under 15%. This kind of EV/Revenue multiple is extraordinarily low for any sort of branded products company. Furthermore, it would be reckless to speculate as to exactly what price could be realized for Nautilus in the M&A market and each investor should do his or her own comps analysis.

One possible path forward for Nautilus is the sale of some of its business lines while holding on to other business lines and completing an operational turnaround.

Activist investors have had success with this strategy before. For example, The Stephan Company (OTCPK:SPCO) had an extraordinary run of terrible performance under its legacy board of directors. The Stephen Company lost money every quarter for more than 30 quarters in a row. After this run of terrible performance, a large number of very successful activist investors came together to replace the entire board of directors and turn around the company. The new board is essentially a 100% activist board, and this new board has successfully turned around the company, with solid free cash flow. The current board is shareholder-oriented and uses almost all the free cash flow for either share buybacks or returning cash to shareholders.

Nautilus is larger than The Stephan Company, and the situations are by no means identical. However, when hungry aggressive determined activist investors decide to make changes to a board of directors, there is often the opportunity for dramatic share price appreciation.

Nautilus is Struggling While a Startup is Flourishing

Over the last 13 months, Nautilus stock is down over 90% due to poor financial performance. In January 2019, the company’s stock crashed over 40% after the company warned investors about poor fourth-quarter results. In the next month, the stock crashed 24% after the company warned investors that weak sales would continue through the first half of 2019.

Amid this poor performance, Peloton, a startup firm, captured the consumers with its creative advertisement. Peloton bikes are not cheap. It costs $1,995 for a stationary bike which comes with an attached wifi-enabled tablet. Additionally, it cost $39-a-month for its subscription service, which lets users access live and on-demand classes. With over 400,000 bikes sold, Peloton is valued roughly $4 billion.

Max Intelligence Platform Fails to Lure Consumers

In November 2018, the company launched Max Intelligence platform, an artificial intelligence-powered training and coaching system to ride along with its Bowflex Max Trainer M6 and M8 cardio machines.

However, in the last two quarters (4th quarter 2018 and 1st quarter of 2019), the company’s revenue declined by 10% and 26% respectively due to slower-than-expected adoption rates. Moreover, the company’s profitability, which was continuously declining since June 2018, registered a net loss of ($8.5) million in the first quarter of 2019.

We had expected to see stronger sales in the direct segment for the fourth quarter, but this was not the case...while overall we received strong positive feedback from purchasers, the product is at a slower start than anticipated.

- Bruce Cazenave, CEO

Nautilus is currently being forced to figure out how to market its product.

We need to find ways to break through and explain this in a way that is better suited for a 30-second and 60-second once the folks who did purchase the product and went through and got educated, there’s general satisfaction it really is more. How do we tell that story more effectively and drive web traffic to the site to learn more? And that’s part of what we talk about when we say we want to retool some of the marketing.”

- Bruce Cazenave, CEO

Unfortunately, Nautilus does not have the time or money to compete against Peloton, at least in the short run.

The company has a few strong brands. TopTenReview which is reviewing elliptical machines since 2011 has ranked the company’s Bowflex as “Best Console”.

Given the strong brand value, the company is better positioned for M&A. I believe that the strong brand combined with the current low multiple given by the market today provides an opportunity for an activist to come in and help facilitate a partial or full sale of the company.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: If you want to discuss shareholder activism in general, or in particular if you want to discuss specific micro-cap stocks and nano-cap stocks that desperately need the attention of an activist, please contact the writer. 

For legal reasons, I am obligated to publish the following disclosure. Nothing written here constitutes investment advice. The writer is not now and has no intention for the future in joining a group with other investors to pursue activism. Any time there is a proxy contest or a competitive solicitation, shareholders are required to carefully read all proxy materials and think all of the issues through before casting their vote.