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On Friday, NutriSystem (NASDAQ:NTRI) fell 31%. The carnage continued Monday as the stock hit new 52 week lows and ended the day at $13.23. It all started with NutriSystem’s earnings report on Thursday night. At Thursday’s close, shares stood at $20.50. By the time the market opened Friday, the price was in the low $14’s, and share prices have continued to drop since then.

Quarterly EPS was in line with expectations at $0.25 for the quarter and was $1.12 for the year. This is where the good news ended, however. According to CEO Joe Redling, the first half of 2010 was strong, but demand decreased significantly in the second half of the year. NutriSystem has been cutting costs and maintaining pricing, which protected its margins, but that may not be able to continue into 2011. The company is struggling to find the right products and promotions, and January was not a good start to the year. NutriSystem offered EPS guidance for full year 2011 of $0.40 to $0.50, including a large first quarter charge.

On the balance sheet side, the company seems to be in good shape for now. It has $41 million in cash and cash equivalents, and just $30 million borrowed against a $200 million revolver. Because of this, the Board authorized its regular dividend for the first quarter of 2011. With the share price drop, that dividend yields 5% annually. The CFO said the dividend was secure even with reduced cash generation for the year.

Here’s his direct quote:

[O]ur forecast is we can pay the dividend and actually put cash on to the balance sheet.

If that’s the case, which assumes improvement in 2012 and beyond, the stock may be an interesting dividend play now that the shares have dropped so much. The issue is that the company is paying out $0.70 of dividends and only reporting $0.40 to $0.50 of EPS in 2011. However, its free cash generation is above that level.

On its quarterly conference call, management noted the difficult competitive environment. The two main competitors to look at are Weight Watchers (NYSE:WTW) and Nestle (OTCPK:NSRGY) subsidiary, Jenny Craig. It’s always been a volatile stock and industry, and it seems to be more so now than ever.

Let's take a look at Weight Watchers for comparison's sake. The company reported outstanding earnings on February 17 and its stock jumped nearly 50% from $45 to $65! Weight Watchers is not a small company. Its current market cap is $4.5 billion, so that jump added about $1.4 billion to the value of the company.

In contrast to NutriSystem, Weight Watchers had a great end of 2010 and a lot of momentum going into 2011. Clearly Weight Watchers has eaten into NutriSystem’s market share. Weight Watchers is a much larger company than NutriSystem, and the company has flexed its muscles over the last six months. I read the transcript of Weight Watchers last conference call and management’s optimism is palpable, while NutriSystem’s management sounded downbeat and searching. In one company you’ve got 15% to 20% revenue gains being forecasted, and the other got questions about their dividend.

Clearly, the two companies are headed in opposite directions, but that doesn’t answer the question of which one is the better investment. This is a fickle industry, as the past year showed, and there is a chance that fortunes could change based on promotions and pricing. With a 5% dividend yield from NutriSystem that appears to be solid for the immediate future, it could be an interesting reversion-to-the-mean type of play.

On the other hand, Weight Watchers seems to be fully valued. It would only take one or two quarters for customer’s tastes to change. At the same time, you may want to wait until NutriSystem’s management comes out with a more coherent direction. This is where Weight Watchers has the advantage, but as an investor, you’ll have to pay for it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: As NutriSystem Hits New Lows, Has It Become an Interesting Dividend Play?