1. Is the company cheap?
EV/EBIT: 6.14 (this is overstated)
Price/Sales: 0.96
Price/Earnings: 8.79
$NLS is priced rather inexpensively, however they had an unusually favorable trailing twelve months, due to Covid-19 and gyms being closed down. $NLS has averaged operating income of $30.24M per year over the last 5 years. If we use this figure, normalized EV/EBIT would be 14.68, which is still cheap but not crazy cheap.
2. Can I easily explain what the company does?
Yes they manufacture and sell fitness equipment, their most notable brands are Nautilus, Schwinn, and Bowflex.
3. Does the cash flow statement line up with income statement?
Not exactly, but cashflows have been higher than reported earnings, so I’m not gonna hold that against them.
A majority of this excess cashflow went to paying down debt and for research and development last year.
4. Is the Balance Sheet Healthy?
Total Debt: $35.57M
Total Cash: $92.78M
Current Ratio: 2
$NLS has a pristine balance sheet! Next to no debt, more than enough cash, and solid cashflows. This box is no doubt checked!
5. How profitable is the business?
Gross Margins: 40.41%
Net Margins: 10.83%
ROE: 20.4%
10-year Revenue CAGR: 12.6%
$NLS is low-key profitable AF, their net margins are a bit high compared to historical averages. Having said that even if net margins shrink to 8%, that’s not too shabby. Especially considering the fact that they’ve grown by 12.6% annually, which is well north of average.
6. Is management rewarding shareholders?
This is where I start to sour on $NLS. They don’t offer a dividend and haven’t repurchased any shares since February of 2020. This seems bizarre to me, especially given that they’ve had an exceptional preceding year and plenty of free cashflow. Moreover management’s capital allocation decisions have historically been less than desirable. Their last share buyback plan was announced on February of 2018 when the stock was trading around $11.85 per share. During the 2-year share buyback stretch their average share price was $13.12/share. At one point $NLS was trading as low as $1.35/share. I don’t understand how a company can be that bad at buying back their own shares? They quite possibly could be the worst market timers on earth.
Furthermore now that the company has no debt, why are they not either buying back shares or offering a dividend? In fairness they did spend a lot on R&D, but $NLS is an equipment manufacturer not a pharmaceutical company. I also found this little nugget in one of their 10-K footnotes:
Including payroll and employee benefits into R&D is at best disingenuous, and at worst borderline accounting fraud. This is pretty shady and there’s no good reason I could find as to why $NLS isn’t returning capital or at the very least funding capital expansion efforts.
7. How does the company stack up against their peers?
The only apples to apples competitor I could find for $NLS is Pelton $PTON:
$PTON Price/Sales: 11.31
EV/EBIT: 175.49
Average Revenue Growth: 102.96% (3 years of data)
There’s no universe in which a 5.5% net margin business ($PTON) deserves and 11.3 X sales multiple. $NLS is the clear winner here as $PTON is un-investable at these levels. Additionally I would like to point out that price ALWAYS matters, regardless of what the company is growing at. You don’t get compensated for buying the best businesses, you get compensated for buying the most mispriced companies!
8. What’s the counter argument?
The counter argument for $NLS is that they’re in very competitive environment, that could potentially be winner take all.
Being that the market cap is so small I actually do think there’s a possibility that stationary bicycles/treadmills could be a winner take all environment. Having said that I would rather bet on $NLS instead of $PTON. There’s nothing proprietary about $PTON’s business model; they strapped tablet on a bike and hired personal trainers to teach classes. Yeah, but what about the Peloton community???? Fuck off, that “community” can be created anywhere, $PTON doesn’t own the internet. Finally $NLS has been in the game for over 40 years and while I agree that $PTON innovated in a very creative way, all $NLS has to do is copy them. In fact, they’ve already started to do so with their own JRNY subscription model!
9. Is the company unsexy, uncool, or contrarian?
Stationary bikes are the new shinny object in town, so analysts are generally bullish and for that reason I wouldn’t consider it contrarian. However $NLS doesn’t afford customers the same status signal as that of $PTON. Therefore; I would consider $NLS unsexy and uncool, as it’s the “poor mans” Peloton.
10. Is there something I think the market may be missing?
$NLS is giving the following 5-year guidance:
If they hit those numbers the stock should at least triple. However the business is cyclical and it wouldn’t surprise me if a couple years from now we remember the stationary bike craze in the same way that we remember shake weights. Be that as it may $NLS is trading at a bargain so even if they do fall short of their growth/profitability target, the stock could still delivery satisfactory returns.
Final Thoughts:
$NLS is trading at a discount and does offer an asymmetrical risk/return, if you believe more growth is ahead. I’m not so sure about that and I’m even more skeptical that customers will be willing to pay $20/month for their subscription model. My current gym membership is cheaper than that and I don’t have to buy anything upfront. Moreover $NLS’ management team comes across rather sketchy and frankly I don’t trust them. Having said that I still think it’s worth tracking, because I could definitely be wrong about future growth. Additionally if management puts in a good faith effort to reward shareholders or decides to change management all together I can swayed back to the bullish camp.
***Disclosure: I have no position in the security mentioned above, nor do I have any plans to purchase within the next 72 hours. This article is intended for educational purposes only and in no way should be interpreted as investment advice.