Kaufman Sees Upside In NutriSystem From Reactivation

| About: Nutrisystem Inc (NTRI)

Kaufman is positive on NutriSystem (NASDAQ:NTRI) saying the stock has pulled back around 40% from its December 2006 high of $75.20. At these levels, they believe that NTRI is undervalued.

In this report the firm examines the economics of the reactivation business (which they feel will be a key driver for 2007 and beyond), the potential benefit of a share buyback program and current relative valuation. Firm is also introducing 2008 revenue estimate of $836 million (up 15% Y/Y) and EPS of $3.55 (up 18% Y/Y).

While new customers are currently the key driver for revenue and EPS for 2007, they believe that 2008 will benefit from reactivating customers, which provide high-margin revenues.

As of 4Q06, they believe NTRI could have $124 million in cash and the firm expects the company to generate another $124.4 million in free cash flow in 2007. If one assumes that NTRI spends all its free cash flow in 2007 on share buybacks (at higher average buyback prices through 2007), it could be highly accretive to EPS.

In the fall of 2006, management had acquired approximately one million shares at an average cost of $50; with the stock lower than the previous buyback price, they believe that management could be inclined to announce a share buyback. A decision could be made during the board meeting to be held before the 4Q06 earnings call on Feb 14, 2007. Additionally, the company could also announce a small dividend sometime this year. ,

Kaufman compared NTRI to two separate sets of companies-ecommerce and diet-related-on an EV/ EBITDA basis. NTRI trades at EV/2007 EBITDA of 8.9x versus a 14.6x average for other ecommerce companies; diet companies trade at an average EV/2007 EBITDA of 10.3x, a 16% premium to NTRI, which has a better growth and margin profile. Even on a GAAP EPS basis, NTRI trades at a P/E multiple of 15x, while the diet company peer group is at a 19.5x multiple.

Firm's price tgt is $85. Reits Buy.

Notablecalls: Expect to see a sizable move following the comments. NTRI is a mover. Actionable call alert!

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