Wednesday, December 30, 2009

12/30/09 Midday Report: The market mimics the Alabama school system as investors close their books until the New Year

With the year coming to a close, trading is thinner than a bulimic after a good gastric banding while market news is scarcer than Paris Hilton's panties or Bernie Madoff's investment returns.  The only real market news out today is that the Chicago ISM was released and measured a whopping 60, though it is unclear what 60 is out of and what 60 actually means, but it was higher than estimates so that must be good.  Apparently, readings over 50 signal expansion which means every time Bar Refaeli shows up on my screen, my pants would read about a 99 on the Chicago ISM scale.  Directionally, the results point to manufacturing in the midwest gaining strength and could signal positive changes for the job market as long as you are looking for a job as a competitve eater, snow shoveler, or corrupt politician (Chicago's 3 big industries).

The dollar is also on a bit of a rally as people forget how much money the US printed and borrowed, thus sending metals prices down.  Money McBags has talked about gold's Bubblicious rise in the past and we are now witnessing some sell off.  Long term, gold still remains a good hedge, though not as good as wearing two condoms when in Thailand.

Finally, GMAC may need more money from the government to the tune of $3B to $3.5B as not only did they finance shitty cars, but they financed them shittily.  As a result of this news, the financial services sector is down as the fear of more bad loans and bail outs is leaving a slight scent on the market (and that scent is a bit like a young skunk who has been urinated on and left to sleep with Amy Winehouse for a week).  That said, remember, these banks are getting free money and lending it out for a heck of a lot more than free so they should be raking in the dough so there are still some good buys out there.

In stock news, Money McBags favorite WILC hit its 52 week high as the shekel increases vs. the dollar and companies (unlike overweight strippers and kleenex) just can't stay ridiculously cheap forever.  Also there appears to be a sell off of momentum names in the weight loss space as NTRI and MED are dropping like Alan Greenspan's credibility.  NTRI announced a $5MM impairment charge yesterday, MED's CEO is regstered as having sold shares, and these names have been flying higher than a coked up Ruppell's griffon so a sell off is not unexpected.  Money McBags does recommend keeping an eye on NTRI as they have had solid returns, recently entered the diabetic market, and have new deals with WMT and Walgreens.  The company is a solid cash flow generator and this country has more fat people than Tiger Woods has STDs, so their business has plenty of room to grow.  It is worth following and waiting for the momentum buyers to finish selling.


Matthew said...

Mr. McBags,

Love the blog. Your mention of NTRI today had me thinking of another "help-make-Americans-slightly-less-disgustingly-obese" stock that I've been looking at lately: Nautilus (NLS).

Basically, new management has come in (Sherborne Investors), booted out the incumbent CEO, sold off non-core assets (like the Pearl Izumi clothing brand), paid off ALL the company's debt, and already turned the company back to profitability (at least on a continuing operations basis).

My model, which I think is pretty conservative (and which I'm happy to share if you're interested) values the company at $2.90 per share. Add in the more than $1 per share in net cash the company will have once it gets its Obama-aided tax refund and closes on the sale of its perpetually loss-making commercial segment, the valuation comes in at almost $4 per share.

The stock is currently trading at $1.85.

Moreover, during better times, Nautilus's stock traditionally traded in excess of 1x sales. The company should do close to $160 million in sales from continuing operations this year. If the stock could simply get back to 0.5x sales, it would imply almost 50% upside from today's price.

Now, there's plenty of risk here. And the consumer these days isn't in the mood, nor has the means, to buy expensive fitness equipment, at least for the next several years. But if management executes, gets the company back to some semblance of consistent profitability (or simply stops bleeding cash), there's a ton of potential value here to be had here.

One thing I like very much is the fact that the new CEO, Edward Bramson, through Sherborne, owns 32% of the stock. He has elected to take no salary, no bonus, no stock options. From the last proxy filing:

"Mr. Bramson, Chief Executive Officer and Chairman of the Board, has elected not to take any salary, benefits or incentives from the Company. As a partner of Sherborne Investors Management LP, a significant shareholder of Nautilus, Inc., Mr. Bramson hopes to realize substantial economic benefit in the form of appreciation in the value of Nautilus, Inc. stock which is beneficially owned by him."

What's that sound? Oh yes, music to my ears.

Any thoughts? I'm not fan of this business by any stretch, but as a cheap turnaround play over the next few years, me thinks there's money to be made here.


Money McBags said...


First of all, call me Money. Mr. McBags is what they call my father. And secondly, thanks for your offer to share your model, but this is the only type of model I would let someone share with me, and that is only if I can go first because Money McBags doesn't do sloppy seconds, not even for Carmen Kinsley's voluptuous backside.

Now Money McBags followed NLS about 1.5 years ago and even shorted it for a time under the simple theory of "Who the fuck is going to buy expensive shit when employment is falling faster than Wilford Brimley's balls." It was a very simple theory, well that plus their reliance on consumer financing, the market shitting it's way to 666, and a new management team taking over who had yet to release their plan. That was all Money needed to make a quick buck (or 42).

But Money McBags has not looked at NLS in a while. I guess the questions to be answered after a quick breeze through are:

1. Who the fuck is buying this shit new when the secondary market is likely more flooded than a diahrretic's colonoscopy bag (and yes, I believe I made up the word diahrettic, so fuck you Miriam Webster and the book you wrote in on)? Seriously, I just went on to craigslist and found 13 TreadClimbers being offered on the cheap as well as 12 ladies who will be my girlfriend for "roses."

2. When are they going to earn money? The lost ~$2MM last Q and sales were still shrinking. At what point do they become profitable?

3. Their cash flow was positive over the last 9 months due to inventory reductions, A/R improvements, and their tax valuation allowance. With inventories having gone from $43MM to $12MM, they can't go much lower. So while I certainly like the $1 in cash they will soon have, I'd like it more if I knew they weren't going to be burning it as well. Look, when I go to my local Rick's Cabaret, I often enter with $300 in cash and walk out with $0, so to tell people I have a lot of cash pre-Rick' is foolish. Cash is only valuable if they can hold on to it or give it to shareholders before they use it to pay to produce more shitty equipment on which people just wind up hanging their clothes.

My verbosity forces me to continue in another comment....

Money McBags said...

Anyway, I don't know how you get to your $2.90 before the $1 add back. I can only assume you used a DCF model since you'd have to believe they can earn ~$.25 next year and thus generously trade at 12x that to arrive at $2.90 (not including their cash, which they may blow through faster than AIG blew through their bail out funds). And if you ran a DCF model, I am calling bullshit since I'll just marginally change your cost of capital assumption or a out year revenue forecast and throw the whole thing out of whack like a Rachel Uchitel booty call phone message on Thanksgiving eve. As for trading at a multiple of revenue, these guys aren't in drug development. They are an equipment manufacturer, so I'd prefer to stick to an earnings multiple.

In terms of the CEO not taking salary and only taking shares, hey that's awesome, but a homeless guy would probably take the same offer. We'll pay you nothing, or we'll pay you a whole lot of nothing in the future, take your fucking pick. It's better than the streets though.

So a quick look makes me a bit skeptical of the $2.90, but the $1 in cash is enough of a cushion that you could be off by 30% and still probably make some money. It is worth looking into more and assessing if the market for these expensive goods that rely on financing (and remember, fewer people are getting loans than are getting the plots to Thomas Pynchon novels) is coming back or at least flattening instead of down 34% like last Q. Money McBags still prefers NTRI (once the momentum sellers stop) because their product is roughly same cost as just eating. So while the expense is front loaded, the fat lazy asswad who needs NTRI isn't shelling out any discretionary income (in fact they might be saving it given the amount of Doritos, HoHos, and Ding Dongs they won't be eating). That said, NLS certainly bears digging into a bit more.

Enjoy the soup,

Money McBags

Matthew said...

Money, my man, your vivacious verbosity is exceeded only by your wisdom. Thank you for departing it on us less-knowledgeable investing soles. Of course, I'll take a break from kiss-assing to point out that the second link in your first comment has an extra period in it, which is currently robbing less html-savvy folks of Carmen Kinsley's voluptuous backside. Please, don't EVER do that again.

Back to Nautilus, I am indeed using a DCF and I'm fine with you calling bull-shit, but here's what I got. I'm using an 11% cost of capital. Generous? Maybe, but that's traditionally what I use for my cost of equity, and compensate by having a bigger margin of safety for dirtier companies, which I think I'm getting here with NLS, especially with the $1 cash.

Sure, sales are still dropping faster than a stock I just bought, but both of the continuing businesses -- the direct and retail operations -- were profitable on an operating basis last quarter. They're in the process of divesting the perpetually-losing commercial business.

Just looking at the company on a continuing basis, they'll do about $160 million in sales this year. I'm calling for sales to rebound 5% next year and continue to grow at 5% per year through 2014, before tailing off to 3% for the next 5, and then a 2% terminal.

In terms of margins, they were able to pull 12% and 17% operating margins in their direct and retail businesses during better times. I don't think they'll get back to there, but I do have them creeping up to 10% and 15% by 2012. Sherborne has taken a lot of costs out of this bad boy, so there is a possibility for upside surprises on margins.

So putting that all in, and estimating capital expenditures at 4% of sales, D&A at 3% of sales (both in their historical range), I get a PV of FCF estimate of $2.90 (based on 31 million shares oustanding).

Granted, maybe my sales expectations are too aggressive. After all, who the hell is buying $3,000 fitness equipment these days? But I'm comfortable with my assumptions, and it wouldn't surprise me in the least to see a bigger rebound in sales than I'm currently projecting.

So dig on my man and let me know what you find. In the meantime, please keep the babes and the dick jokes coming. I'm enlightened every day.


Money McBags said...


I have never been so ashamed and disappointed in myself in my life. Posting a dead link to the spankriffic anus of Carmen Kinsley is a high crime in my book (and my book contains only pictures with some pages stuck together) punishable by having to masturbate to pictures of Miyam Bialik for a week. I will remedy this situation by giving you this very not safe for work link, in fact this link may not even be safe for home, but it is the beautiful Ms. Kinsley's "bubbly" self in the midst of her craft. Unfortunately, her seminal (and semenal) work titled "Corn Fed Booty" is no longer available for free. So consider that link my olive branch if you will, but i wouldn't actually touch the olive branch because it is a bit sticky. Oh yeah, this is the link that didn't work.

As for your NLS dcf, that is so quaint. If Warren Boofay is readng this (and I know he is), hearing of your dcf likely warmed the cockles of his heart (whereas Faye Reagan warms the heart of my cockles).

Anyway, the real question is how do you expect them to grow 5% per year from now until 2014? Seriously, they are selling expensive shit that is completely discretionary and cheap as balls on the secondary market (though apparently not as cheap as Tiger Woods' balls). So how do you get a 5% per annum growth for 5 years? Why not 6%? Why not 4%? Why not 39% as long as we're making up numbers. I am sure you are a terrific analyst, but if you can forecast NLS sales in 2014 to within $10MM of the actual number, then you and Nostradamus should go have a beer at RICKs. That is my problem with DCFs. There is zero chance any of your numbers for 2012 and beyond are right. In fact I will wager 1 share of ZAGG (and that is funny because ZAGG is going to $0), that you are not even right for 2011 or 2010. Other than saying, hmmmm sales were down 35% and the economy seems to be picking up a bit so NLS should grow 5%, what actual industry data or trends do you have to support that number? It was pulled out of thin air simply because it is a round number and not too high.

Did you forget that they slashed their advertising budget to cut costs and will have to bump that back up if they want to grow? So I remain skeptical about them growing 5% a year for the next 5 years or in any year really, especially as they were down 35% last Q.

What happens if you use a 12% cost of capital and a 1% terminal growth rate (since all of the value in a dcf is in the terminal value)? My guess is that $2.90 drops faster than Divine Brown drops to her knees in a dark alley.

Still, it is a very interesting idea with the $1 of cash and it trading at $1.90. They just need to not fuck up and have things get marginally better to extract some value, so Money McBags will keep his eye on this. Your guess is reasonable enough, but Money McBags needs some more proof that the expensive completely discretionary home gym equipment market will do anything other than wallow. Perhaps when new home starts kick up for real.

Either way, enjoy a big New Year's Eve ,

Money McBags

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