Cybex Int’l

I’m almost embarrassed to admit to this… I feel like Mohnish Pabrai (sorry Mohnish, I liked your concentrated strategy much better). I decided to place what Pabrai calls a “basket” bet. This is when you don’t necessarily feel certain about any given investment, nor can you precisely ascertain a value for a company, but rather feel as though the odds are in your favor and therefore is worth placing 2-3% of your portfolio into. I’ve seen a few situations like this pass me by (with much success going to the shareholders after I decided to pass), and for the first time, I’ve decided to place a basket bet; this one is in Cybex Int’l.

As a quick background, Cybex is a manufacturer of weight lifting equipment and competes with Nautilus & ICON Health, among others. The industry seems to have very cyclical demand (you could even call it a “fad purchase”) for products, and purchases of exercise equipment fell off heavily in the recession 2007-today. Cybex & Nautilus have both been bleeding cash the last few years; ICON Health isn’t public but I’d assume a similar scenario. Nautilus & Cybex’s market valuations have been hammered hard and are trading much below multi-year lows (ignoring Nautilus’ recent price run up, of course).

Cybex’s market valuation has fallen even further because of a recent lawsuit that occurred. A 105-lb. woman, Natalie Barnhard, pulled a 600+ lb. leg extension machine on top of herself in a gym in 2004. She was a physical therapist at the gym and used the leg extension machine as a support while stretching her shoulders. This is clearly not the manner intended for use as a leg extension machine; it would be like pulling a washing machine on top of yourself and blaming Whirlpool. It was apparently proved in court that it took less than 40 lbs. to tip the machine. This adds much credibility to her argument, but I still feel as though this woman, who was employed by the gym, should know better when operating with heavy equipment like this.

Cybex lost this lawsuit and the accident was judged to be 75% Cybex’s fault, 20% gym’s fault, and 5% Natalie. The damages awarded were $66 million, so Cybex stands to owe $49.5 million currently. Cybex has a $4 million in insurance coverage for lawsuits of this nature, so they owe a net total of $45.5 million. As you can see by their historical financials, the company is in no shape to pay an amount even approaching $45 million. Therefore, the company will likely go bankrupt should these damages need to be paid.

As you can also see from their financials, it has been a cyclical ride the past decade. If we reasonably expect Cybex to earn $3-5 million in a year or two, this current valuation of $12 million in the market today is extremely low. The business has made $5-10 million in operating profits consistently, even if some years there was a net loss. I don’t think there’s a certain value that I can point to because their balance sheet is meaningless (lawsuit liabilities would cover their assets, and then some) and their earning power is all over the place. Knowing that $12 million is far too low of a valuation works for me; I’ll just stay diversified in this bet.

Some additional notes on this case include the fact that the piece of equipment she pulled on herself was made in 1983 and no similar accidents have occurred in the 25 years it sat in the gym, with it being used millions of times. It wasn’t bolted to the floor the way many other machines are; this probably is why the gym is 20% at fault. This lawsuit was the single largest amount in damages set in Erie County, NY and set a record (clearly an unreasonably high amount). Also, Cybex employs over 600 Americans and I’d be surprised if appeals courts allow this company to go bankrupt.

Here’s the press release from the company following the lawsuit decision. They sound very angry and still believe in their case (an appeal is highly likely here). I’ll leave the rest up to you to decide and perhaps place a small basket bet as well. I’ve seen a few similar companies (Zales, Nautilus) in the last 6 months that possessed similar qualities to Cybex and subsequently have moved up considerably in the market.  I plan on holding Cybex and watching what happens.

Also, don’t bother contacting investor relations; they’ve decided to stay quiet about everything and won’t respond to questions.

As a final note, I would have bought long-term options on a situation like this where the downside is bankruptcy & the upside is 2-5X my money, but there are no options trading on Cybex currently. I plan on trying this out in the future on other similar events-based situations.

Here are some news links: onetwothree. For link two, it’s only good for the commentary from some of the legal experts.


About Andrew Schneck

I am a value investor focused on misunderstood securities and industries, with an eye for long-term stock ownership.
This entry was posted in Basket Bets, Cybex International and tagged , . Bookmark the permalink.

6 Responses to Cybex Int’l

  1. adib says:

    Hi Andrew,

    Firstly, you have an excellent blog and you write quite well. So keep it up!!

    I thought a basket bet was where you like a particular sector and feel its under valued but are not able to make up your mind on a single stock. example : Rig companies after Gulf Of Mexico oil spill in 2010. Companies such as NE, ESV, RIG, DO all fell. Some were not even directly related to the spill. Instead of deciding to buy just one of them, one could have bought all 4 of these companies. ( I ended up buying ESV but had considered NE). I think this kind of approach to investing is a basket bet.

    In your case, you buying one stock because you think the odds are in your favor , I am not sure thats called a basket bet…

    Thoughts appreciated.

    – Adib

    • schn1eck7 says:

      Thanks for the clarification on the definition of a basket bet; the first time I heard it it was in reference to very small bets placed where the odds seemed in your favor. I didn’t realize it was all the same industry or a similar group of affected investments… either way, it doesn’t matter what I label it as. It’s a small bet that I would diversify into if there were similar pricing available on other stocks.

  2. JR says:

    Another great article man (the other one I responded to was HRB). I didn’t end up investing in that one – I think it was around 11 when we spoke. Take a look today in just a few months!

    This is an interesting situation as well. Let me know if you want to discuss in more detail…

    • schn1eck7 says:

      Thanks jonathan,

      Yeah I’d love to talk about it more, although I missed the boat here. I bought at the same time of this article, then sold when I was in the process of moving my money from my individual account into a fund I’m setting up. Stock jumped something like 70% during that time & I’m not sure I want to bother with it any more… do you have information on this one?

      & yeah, turns out you were right on HRB. I’m fine with it, still a learning experience for me, but at least I’m sticking to my guns on strict standards. I’d rather be too strict than too lenient on valuation- keeps me honest. Sounds like you didn’t buy either, guess neither of us made money on the research there haha

  3. JR says:

    yea there will be others. I was amazed you found pulse seismic too. that was a great article that guy wrote that got whore-d all over the internet. stock hasn’t moved much though. that one I own in very large quantities. I’m not as concentrated as you but its about 10% of my portfolio. I would suggest you take another look. past is not always prelude especially in this case…

    cybex is really interesting. I like the CEO. He owns lots of stock and reads ayn rand. it seems like such a ridiculous thing — why didn’t they say the machines HAVE to be bolted down. that why they would have deny-ability. I never bought this one and I actually think they will go bankrupt. there may be an opportunity prior to/when they emerge (if they emerge?) after some kind of settlement. also because I think the business is cyclical as you say and they have the potential to make a lot more money as the economy improves. One I’ve found based on that idea is Lojack — you should take a look…

    • schn1eck7 says:

      I’m pretty sure I didn’t find pulse seismic, I’ll take a look though (as well as at Lojack). 10% is a lot, I have changed my strategy down to more like 10-20% per position, I have 5 positions of that size currently. I’ll email you with my findings next week on those 2 you mentioned (will be in Omaha for the Berkshire meeting this weekend & have a few other companies I’m currently researching).

      I do find Cybex interesting still, although not so much as to justify investing any more… funny how they forget to do simple things like telling people to bolt it to the floor.

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