Nutrisystem's Becoming Dirt Cheap, With High Short Interest

A couple of firms comment on Nutrisystem (NASDAQ:NTRI) after Q3 results were announced last night:

- CIBC notes they continue to expect substantial risks to NTRI's business in 4Q and see challenges in 1Q08 as well. Firm sees a renewed marketing push for alliTM early in 2008 which could pressure NTRI's new Advance program. There are no changes to their FY07 and FY08 EPS estimates.

They believe that the success of NTRI's Advance program is pivotal to the brand. There is little information on the menus, but they think that unless there is a major new weight loss benefit to consumers, Advance may be more helpful to reactivation sales than switching customers away from alli.

Despite depressed PE multiples and solid cash flow, they see further downside near term for NTRI shares. New customer revenues represent 50%+ of the total. Unless, there is firm evidence of a revival in new customer add rates, it will be difficult for NTRI's multiple to recover.

- Citigroup is far more positive, saying 4Q guidance was conservative and inline with what they expected -- flat sales, (20)% new customer growth and mid 30c EPS. Firm continues to believe NTRI is on track to achieve their ests of 7% sales growth, (14%) new customer growth and 39c EPS.

Management mentioned that they expected y/y growth in 2008. Trading at 7x 2008 EPS, investors are clearly expecting a meaningful EPS decline. Citi disagrees and expects decent growth in 2008 due to new initiatives launching in 1Q08 that include a new ad campaign, food products, and Canadian market entry. They are also encouraged by reactivations driving 90c of EPS in 2007 and significantly greater contribution expected in 2008.

NTRI has a free cash flow yield of 10%. In addition, the company has the immediate capacity to buy back a little less than half the outstanding shares not held by insiders. Also, the firm would not rule out a private equity/mgmt buyout if shares remain at depressed levels. Maintains Buy and lowers tgt to $52 from $55 due to lower tgt multiple.

Notablecalls: I don't see NTRI as a broken story here. Prior to Allis’ launch in mid-June, NTRI was growing customers in the 50% range in 1H07. 3Q is declined 7%. Citi do not believe it is likely the company reached a saturation point in one quarter — rather, it was likely a result of competition from Alli, which they think is a short-term impact. I continue to think they are right.

The Atkins diet fat lasted more than a year and it's quite possible that Alli's will too. But considering Alli's side-effects profile, NTRI offering will likely have the last say. Remember, NTRI has been around since 1972.

NTRI is getting dirt cheap here and with a 40%+ short interest, that's a dangerous combo if you're short the name.

The stock was down close to 10% in after hours action. I see it as a bounce opportunity.