NutriSystem Investors Sell Off Shares Like a Binge Dieter Shedding Pounds

Jul.25.07 | About: Nutrisystem Inc (NTRI)

Small Cap Watch List member NutriSystem, Inc. (NASDAQ:NTRI) announced results for the second quarter ended June 30, 2007:

— An increase in revenue of 61% to $213,556,000 in the second quarter of 2007 compared to $132,631,000 in revenue in the second quarter of 2006;

– Growth in operating income to $52,729,000 (24.7% of revenues) in the second quarter of 2007 compared to $31,030,000 (23.4% of revenues) in the second quarter of 2006; and

– An increase in diluted earnings per share of 81% to $0.96 in the second quarter of 2007 compared to $0.53 per diluted share in the second quarter of 2006.

The consensus among Wall Street’s finest was that the company would earn $0.85 on $194 million in sales, so at first blush it is hard to see why the stock plummeted in after hours trading. Scrolling a little further down the press release we see the likely explanation:

For the third quarter of 2007, the Company estimates that revenue will be between $200 and $208 million, and expects diluted earnings per share to be between $0.77 and $0.82.

The consensus for next quarter was $0.89 on $209 million in sales. So basically the company is saying it will give back $0.07 - $0.12 of the $0.14 upside they had in the second quarter.

The Company is raising its full year 2007 guidance and now expects revenue to be between $810 million and $820 million and 2007 diluted earnings per share to be between $3.46 and $3.52 per share.

The previous estimates were $3.43 on $800 million. So the $20 million upside to Q2 revenue is offset by approximately $5 million in downside to the rest of the year, while $0.05 - $0.11 of the $0.14 earnings per share upside is expected to be given back during the remainder of the year. Hardly justification for a 20% drop in value in two days.

If you ask me, the investors in NutriSystem are like binge dieters, and the weight of the stock (in their portfolios) goes up and down like a yo-yo. I look at the chart and see this isn’t the first big and sudden drop. I look at the fundamentals and think it could probably be as temporary as the others.

NTRI 1-yr chart:

ntri 1-yr chart