Imperial Says Nautilus Shares Could Touch $30 By 2018; Starts At Outperform, $24 PT

Imperial Capital has started coverage of Nautilus, Inc. (NYSE: NLS) with an Outperform rating and $24 price target, citing potential upside in shares from disciplined execution, new products and significant free cash flow.

The target price of $24 represents an upside of about 35 percent from the recent share price, and the brokerage sees "potential for the share price to reach $30 by year-end 2018," if the company can deliver on its guidance.

"Nautilus, a consumer fitness products company, has executed well over the past five years and is positioned to achieve management's 3–5 year forward guidance, which calls for further revenue and margin gains. New products and acquisitions could potentially provide upside, in our view," analyst George Kelly wrote in a note.

Kelly believes management's recently set three- to five-year guidance is achievable and calls for revenue growth of 10–12 percent, operating margin of 11–15 percent and EBITDA margin of 13–17 percent. In addition, the company has a strong portfolio of products, has consistent incremental margins and the credit environment appears stable.

Related Link: Nautilus And The Sports Authority Shutdown: Wunderlich Stays Bullish

Further, "Nautilus has a full pipeline of new products and its clean balance sheet and strong free cash flow would support further acquisitions." As of March 31, the company had $73 million in cash and $76 million in debt. Kelly sees about $150 million in total free cash flow between 2016 and 2018.

For 2016, Kelly expects adjusted EPS of $1.10 a share on revenue of $435 million. The Street expects earnings of $1.14 a share on revenue of $437.29 million.

On the valuation front, Kelly noted that Nautilus trades at a significant discount to sporting goods and fitness peers.

"Our one-year price target of $24 is based on 10x 2017 EBITDA, on par with the peer group. At $24, the stock carries a 7 percent FCF yield. We see a path to a $30 share price by year-end 2018," Kelly added.

Shares of Nautilus were up 3 percent at $18.21 at time of writing.