8/13 Focus Stock – Nautilus Inc. (NLS)

Most everyone has heard of the Bowflex from a late night infomercial enticing you with fabulous abs. Maybe some other home exercise equipment with the Nautilus name. If not, then if you’re a member of a gym, you’re familiar with Nautilus equipment either directly by its brand name, or one of the other brands it produces – like Universal weights, or possibly others under the Schwinn name.

In any case, Nautilus popped up on one of our custom reports on Friday. We produce a few custom reports for some of our clients, and this particular report highlights stocks/companies where more than one insider transaction takes place. An important item regarding this custom report, we don’t exclude option-related transactions. Many times, people will ignore option related transactions when reviewing insider trading activity. We believe the information should not be ignored. Maybe not as important as outright purchases or sales, but it is still an important data point as we’ll see here.

If you quickly review the report, and jump to the Nautilus entry we see that on Thursday Aug 9, there were two insider filings. One was by William McMahon (Chief Operating Officer), the other by Linda Pearce (Chief Financial Officer). Of particular note here – Ms. Pearce was awarded options on 30,000 shares (vesting over three years) on Thursday at $2.47/share – the very day she was given the CFO position. However, a press release of the appointment was not issued until today, two business days later. So, first key item – we knew on Friday that Ms. Pearce was hired as CFO – the SEC Form 4 stated it.

NAUTILUS, INC.(NLS) What Shares Price
MCMAHON WILLIAM B COMMON STOCK 100 2.47
MCMAHON WILLIAM B COMMON STOCK 200 2.48
MCMAHON WILLIAM B COMMON STOCK 500 2.47
MCMAHON WILLIAM B COMMON STOCK 7,200 2.50
PEARCE LINDA M. STOCK OPTION (RIGHT-TO-BUY) 30,000 0

On Friday, a third insider transaction was noted for Wayne Bolio, SVP of Law and HR for 5,000 shares purchased at $2.37/share, bringing his total ownership to 35,800 shares.

It’s my belief that it was no small coincidence that the insider purchases all took place on Aug 9 along with the option grant to Ms. Pearce.

Investors would be wise to take note of the transactions, in conjunction with the latest earnings report.

I’ll go through my general analysis which provides additional reason to be purchasing NLS shares at the current price, and any lower.

1. How many shares were bought or sold in relation to the amount owned before the transaction(s)?

As mentioned above, Mr. Bolio went from 30,800 to 35,800 shares for about a 16% increase in holdings. Mr. McMahon went from 17,760 shares to 25,760, an increase of about 45%.

View: Positive

 2. Is the stock price near its recent or long-term high or low?

The stock is in the middle of the 52 week high and 52 week low. However, the current price is a sharp drop from the 52 week highs it was flirting with just a few weeks ago and 25% off of the price of just the prior week.

The insiders jumping in and purchasing a fair number of shares shows they believe the stock is undervalued at the current price. Additionally, the awarding of options to Ms. Pearce at a price of $2.47 was done after the fall in the stock, likewise, to get her a good entry point.

View: Positive

 

3. What do the fundamentals and earnings picture of the company look like?

Nautilus has gone through a few tough years. The recession has hurt companies which rely on discretionary spending very hard. However, Nautilus is on the rebound. The swift plunge in the stock price attributable to the earnings report just filed was way too harsh. The earnings posted were extremely good, indicating a continued return to profitability, and a strong balance sheet.

Why has the stock been so harshly attacked over the past few days? A loss was posted for the quarter. However, it was expected, and is still a marked improvement over a significantly larger loss in the same quarter a year ago. Honestly there is no especially good reason for the haircut seen over the past week of trading. Fortunately, for investors who can look beyond the games that Wall Street plays, bargains present themselves. Nautilus is one of them.

To summarize, year over year profit is up, year over year revenues are up 14%, profit margin is up, and long-term debt has been eliminated – this company is debt free. In each of the past four quarters, the company has beat profit estimates handily.

Make no mistake, this is a turnaround situation, and it has made the turn back to profitability. The back half of the year is where the seasonal strength is seen, so with the plunge in the share price, now is the time to be looking to take a new position,  increase or average down an existing position.

View: Overly Positive

4. Are there any other items of interest that may raise red or green flags?

a) Insiders have a decent history of purchasing/supporting the stock. They’ve routinely purchased shares over the past year, and they’ve decided to purchase again, now, with the stock down 25% in just a few days.

b) Analyst estimates are for continued increasing profitability. FY2012 is estimated at 25 cents/share – more than triple prior year, and FY2013 is estimated at 36 cents/share an increase of 44% over 2012. A quick calculation gives a 2012 PEG of 0.05 at the current stock price (2012 EPS of 25 cents, growth of about 200%). Forward PEG ratio calculation at the current share price gives about 0.15 (EPS of 36 cents,  growth of 44%) – clearly a strong buy.

c) A week ago, Forbes wrote that should the stock fall to $2.90, it would technically be oversold.

View: Positive


Overall View: Very Positive

I try to stay away from making stock picks and recommendations here, and simply focus on what we can infer from the insider transactions. However, in this case, if your portfolio is looking for some exposure to a small bit of speculation, Nautilus is an excellent choice. The company is debt free, it has returned to profitability, and the remainder of the year is seasonally the strongest, you can get it at a 25% discount, and you have insiders purchasing right along side of you.


Do you own NLS? Have any thoughts on these insider purchases? Other thoughts? Let’s discuss it.


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