Is NutriSystem Healthy At $30/Share?

Is the Nutrisystem drop old news? In the stock market, you'd have to say yes because things happen so quickly. Still, we can learn lessons from virtually every event in the market. Once we get through the noise and look at the business, things begin to make a lot of sense.

Let's look at Nutrisystem from a business perspective:

Two weeks ago, Nutrisystem saw 25% of its market cap (and share price) wiped out in a New York second. Price follows value—and sometimes it can happen just that fast.

The Value of Nutrisystem

The science of investing tells us that the value of Nutrisystem is equal to the cash that can be taken out of the business during its remaining life, discounted by an appropriate rate. In this case, let's use 9% because we are going to apply the F Wall Street and John Burr Williams/Mohnish Pabrai methods and need to compare apples to apples.

Modest Growth

Let's assume that Nutrisystem (NTRI) will experience modest growth for the next ten years—say, 13% for three years, then 11% for three, and then 10% for the next four—ultimately slowing to 5% for years 11-20. Let's further assume that Nutrisystem can be sold for 10 times cash flow in ten years (required for the Pabrai/Williams model).

Why did I choose these rates as opposed to the super-extreme growth rates Nutrisystem has been experiencing? No matter what happens in the past, a business will only grow at roughly its rate of CROIC going forward. That is, for every dollar invested, if the company can generate $0.15, it can be expected to grow at roughly 15%. (More on that tomorrow.)

For the past five years, NTRI has had a median CROIC of just under 17%. If we err on the side of caution, we can value the business using roughly 75% of that.

Note: Don't think I'm changing assumptions here. Do the same thing with JNJ, AEO, or other companies we've analyzed here and you'll find that the valuation comes out about the same for those.

The Results

The Pabrai/Williams and F Wall Street methods both come up with the same valuation—roughly $38.40 a share. Two weeks ago, the company went from nearly $50 to nearly $30 in a day—from overpriced to slightly underpriced. Price follows value—and here's another chart to prove it:

Will It Become A Buy Under $19.50?

If we demand on a 50% margin of safety, NTRI would theoretically be a buy under $19.50 a share. Still, practice is different than theory which is why we have to look beyond the raw data.

Try and apply a fundamental (Pabrai-ish) rule to investing and you'll likely stay away from NTRI—stick with simple, slow-changing industries.

The Nutrisystem Moat

What is it going to take for a competitor to swim across Nutrisystem's fragile (if existent) moat and break down the walls? People are finicky, compulsive dieters (at least in the US), and are always looking for a quick fix to weight loss. A new book or diet will chip away at their market share—at least a little bit. But the real danger comes from outside Nutrisystem's industry—big pharma.

Nutrisystem must contend with its direct competitors, and must ward off big pharmaceutical companies developing cheap weight loss drugs. NTRI has to fight for every penny, and has a finite future. After all, who is going to pay a few hundred bucks a month for their food when you can pay a few hundred bucks a month for a pill—and eat McDonald's every day!

The Nutrisystem Result

Can money be made in Nutrisystem? Probably. Still, its inconsistent past, its finite future, and its fair price to value are less than mouthwatering. And its price drop? No surprise there. A company can be overpriced for days, months, or years. Still, if value doesn't catch up to the price, price is certainly more than happy to drop to meet value.

Comments

[David555:]

Joe,

How do you calculate CROIC? Sorry for the elementary question.

In addition, what is the earnings/fcf, etc...that you used in the base year for the analysis of NTRI?

I found the article to be very interesting.

Thanks,
David

2007 Oct 17 01:03 PM

[Pras:]

What a crap. How can you be so dumb. I guess you will revise your analysis post earnings.

2007 Oct 23 01:46 PM

[Pras:]

Read the Article on BBC
news.bbc.co.uk/2/hi/he......

It says Canada has the worst of the obesity problems in countries except the US. NTRI is going to Canada. Another big market.

Another note about Alli. There have been 2 million customers taking/have taken Alli since launch. It only caused a dent of 30K (12%) customers for NTRI during the period. GSK approximates around 2 Million customer for Alli for the whole year going forward. That means a 12% / 4 = 3% (4 quarters) reduction for NTRI, which is not as alarming as people here sound to be.

Also note that because of this drop of the customers (from an expectation of 250K to 215K) the CAC went up from 180 expected, to 210. Maths is
$180 * (250K/215K) = $209.

So there is not a whole lot of surprise with this high CAC. Alli caused only a drop of 14% customers in their launch period. I think the effect is only going to abate going forward. On different note I alos think that the customer base for Alli and NTRI is not totally inclusive of the either.

Still holding on to hope that the ER confirms my hypothesis, and the street appreciates it.

2007 Oct 23 01:47 PM

[Pras:]

Read the Article on BBC
news.bbc.co.uk/2/hi/he......

It says Canada has the worst of the obesity problems in countries except the US. NTRI is going to Canada. Another big market.

Another note about Alli. There have been 2 million customers taking/have taken Alli since launch. It only caused a dent of 30K (12%) customers for NTRI during the period. GSK approximates around 2 Million customer for Alli for the whole year going forward. That means a 12% / 4 = 3% (4 quarters) reduction for NTRI, which is not as alarming as people here sound to be.

Also note that because of this drop of the customers (from an expectation of 250K to 215K) the CAC went up from 180 expected, to 210. Maths is
$180 * (250K/215K) = $209.

So there is not a whole lot of surprise with this high CAC. Alli caused only a drop of 14% customers in their launch period. I think the effect is only going to abate going forward. On different note I alos think that the customer base for Alli and NTRI is not totally inclusive of the either.

Still holding on to hope that the ER confirms my hypothesis, and the street appreciates it.

2007 Oct 23 01:47 PM

[Pras:]

Read the Article on BBC
news.bbc.co.uk/2/hi/he......

It says Canada has the worst of the obesity problems in countries except the US. NTRI is going to Canada. Another big market.

Another note about Alli. There have been 2 million customers taking/have taken Alli since launch. It only caused a dent of 30K (12%) customers for NTRI during the period. GSK approximates around 2 Million customer for Alli for the whole year going forward. That means a 12% / 4 = 3% (4 quarters) reduction for NTRI, which is not as alarming as people here sound to be.

Also note that because of this drop of the customers (from an expectation of 250K to 215K) the CAC went up from 180 expected, to 210. Maths is
$180 * (250K/215K) = $209.

So there is not a whole lot of surprise with this high CAC. Alli caused only a drop of 14% customers in their launch period. I think the effect is only going to abate going forward. On different note I alos think that the customer base for Alli and NTRI is not totally inclusive of the either.

Still holding on to hope that the ER confirms my hypothesis, and the street appreciates it.

2007 Oct 23 01:50 PM

[Pras:]

Read the Article on BBC
news.bbc.co.uk/2/hi/he......

It says Canada has the worst of the obesity problems in countries except the US. NTRI is going to Canada. Another big market.

Another note about Alli. There have been 2 million customers taking/have taken Alli since launch. It only caused a dent of 30K (12%) customers for NTRI during the period. GSK approximates around 2 Million customer for Alli for the whole year going forward. That means a 12% / 4 = 3% (4 quarters) reduction for NTRI, which is not as alarming as people here sound to be.

Also note that because of this drop of the customers (from an expectation of 250K to 215K) the CAC went up from 180 expected, to 210. Maths is
$180 * (250K/215K) = $209.

So there is not a whole lot of surprise with this high CAC. Alli caused only a drop of 14% customers in their launch period. I think the effect is only going to abate going forward. On different note I alos think that the customer base for Alli and NTRI is not totally inclusive of the either.

Still holding on to hope that the ER confirms my hypothesis, and the street appreciates it.

2007 Oct 23 01:50 PM

[Pras:]

Read the Article on BBC
news.bbc.co.uk/2/hi/he......

It says Canada has the worst of the obesity problems in countries except the US. NTRI is going to Canada. Another big market.

Another note about Alli. There have been 2 million customers taking/have taken Alli since launch. It only caused a dent of 30K (12%) customers for NTRI during the period. GSK approximates around 2 Million customer for Alli for the whole year going forward. That means a 12% / 4 = 3% (4 quarters) reduction for NTRI, which is not as alarming as people here sound to be.

Also note that because of this drop of the customers (from an expectation of 250K to 215K) the CAC went up from 180 expected, to 210. Maths is
$180 * (250K/215K) = $209.

So there is not a whole lot of surprise with this high CAC. Alli caused only a drop of 14% customers in their launch period. I think the effect is only going to abate going forward. On different note I alos think that the customer base for Alli and NTRI is not totally inclusive of the either.

Still holding on to hope that the ER confirms my hypothesis, and the street appreciates it.

2007 Oct 23 01:51 PM

[paulredhershey:]

I guess I put my money where my mouth is on this one. My brother had lost 40 pounds on nutrisystems and had kept it off. I joined and quickly lost 25 pounds. I have 15 more to go. I have tried other diets in the past with limited success. The secret to this diet was the simplicity of it. Meal proportions sent to my door in easy to prepare and eat packaging. I did not have to go to a weight loss center or keep away from certain food groups. The real news about nutrisystems is that the diet actually works. Unlike diet pills, there are no lingering side effects. When I checked the earnings of the company and growth rate, I decided to start to slowly invest. The stock has now come down considerably due to a missed earning report. I only know two people on Nutrisystems, myself and my brother. In my opinion they are far from market saturation. There will always be competition in the weight loss industry. Will they remain the leader? Is this earnings disappointment a sign of future disappointments? If so, the stock will continue to languish. I am betting my next investment in this company that they will get back on the growth track.

2007 Nov 07 05:15 PM