Nutrisystem Headed for a Turnaround

NutriSystem Inc. (NTRI) provides weight-management systems and fitness products and services in the U.S., including an at-home weight-loss program that features prepackaged food and dietary counseling. NTRI shares recently closed at $13.33, down sharply from its 52 week high of $74.09. I believe the shares are attractively priced at this level.

For the full year of 2007, revenue totaled $777 million, up 37%, while EPS increased 30% to $2.92. However, EPS fell to $0.33 in 4Q07 from $0.54 in the prior-year period as a result of steep increases in expenses. The company guided revenue of $690 million to $710 million for 2008, down from $776.8 million in 2007. The average estimate of five analysts polled by Thomson Financial Network was that the company would post revenue of $825.3 million this year. Chairman and CEO Michael J. Hagan attributed the expected revenue decline to the economy, but said the company was still optimistic about its long-term potential and was planning to enter several foreign markets.

Compared to Weight Watcher's International Inc. (WTW):

• NTRI at $13.33 share... WTW at $46.88/share
• NTRI at zero debt... WTW at 1.65 billion debt
• 31.74 million share float... WTW has 36.03 million float
• 66.6% short position (down from 71.5%)... WTW only a 6.9% short position
• 2008 eps at 2.05/share... WTW at 2.92/share
• 2009 eps at 2.39/share... WTW at 3.24/share
• P/E of 4.5... WTW at 18.9
• PEG ratio .33 ... WTW at 1.39
• More geographic expansion potential for NTRI compared to WTW. NTRI is expanding into Canada in 2008 and the U.K., Germany, Japan, and Australia in 2009.

Looking at these important numbers, one would expect NutriSystem Inc.'s shares to be trading much higher.

The company's customer growth faces challenges, including GlaxoSmithKline's (GSK) introduction of the diet pill Alli, as well as by aggressive advertising from other weight-loss companies.

However, this appears to be a short-term threat. The effectiveness of Alli is unproven, and its users complain of stomach pain and gas. Many users have not lost much, if any, weight. NTRI, on the other hand, has a relatively high reactivation rate, and customers are pleased with the results. The company signed up 218,000 new customers during the fourth quarter, 7% more than in the prior-year period but below guidance of 245,000. NTRI will likely need to spend heavily to promote its products, decreasing operating margin, but this should be offset in part by solid international growth and share repurchases.

For the long term, I am optimistic about the company's growth prospects. There is much room for growth in the diet industry. I expect increased promotions, returning customers and international expansion will result in a turnaround.

Disclosure: Author has a long position in NTRI but has no other positions

Comments

[Robert DiAl...:]

NTRI better get it together soon. Can't believe how much they have been punished.

2008 Mar 18 09:20 AM

[EddieInAlbq:]

I agree with you Eric. NutriSystem is way OVERSOLD. I am astonished that there is a 66% short position on a stock this undervalued. I think that investors are concerned about the Sanofi-Aventis drug called Acomplia, but it got clobbered in a review by the FDA last June due to serious side-effects.

When FORTUNE magazine released its list of America's fastest-growing companies on September 4rth, 2007, guess what company topped the list? NutriSystem!! With 66% of the American population overweight, there is a HUGE market out there. And as you mentioned, NutriSystem is now rapidly expanding into foreign markets.

2008 Mar 18 12:30 PM