NutriSystEm: Clinton Group Calls For A Sale

| About: Nutrisystem Inc (NTRI)
This article is now exclusive for PRO subscribers.


Clinton has NTRI as its 2nd largest equity holding and has been active in the stock for a couple years.

But the weight management business is a tough market to be in .

And the only real catalyst appears to be a sale of the company.

It looks like we have another mismanaged company that's in need of a makeover. Enter stage left: Clinton Group. The activist hedge fund owns over 428,000 shares of NutriSystem (NASDAQ:NTRI) and thinks that the company could be better run as a private company. The only thing is that NTRI isn't so mismanaged these days.

Clinton has been putting pressure on NTRI since 2012. Shares are up near their 52-week high.

The latest pressure Clinton is putting on NTRI is for it to sell itself. It's also trying to get NTRI to buy back shares - the company has no debt and over $1.30 a share in cash. But worth noting is that NTRI already offers a 3.8% divined yield; however, even that's a full percentage point below its five-year average dividend yield.

Clinton notes NTRI's strong performance, but asserts that the company has grossly underperformed when it comes to providing shareholders with sufficient information.

The hedge fund is also happy with current management. But the stock price remains a point of concern - with shares down 75% since their 2007 highs.

NTRI does trade at 35x earnings and 21x free cash flow. Both of these metrics are above the industry average and NTRI's five-year averages. So the valuation isn't all that appealing. Its 16x ev/ebitda multiple is a bit rich for a 16% ROI business.

Nonetheless, with the buyout possibility there, it means that NTRI will continue to trade at a premium. Clinton has noted that the company is already aware of the private equity interest in the company. And has noted that even in a buyout current management would remain in place - leaving little reason for management not to entertain a takeout offer. Clinton also thinks that NTRI could bring in at much as $23 a share in a buyout today - almost 20% above where it trades now.

Clinton is done patiently waiting and the sale is the main catalyst. It is worth noting that NTRI has already met all the major demands of Clinton, aside form getting itself sold. And Clinton's main argument for going private is that the public markets aren't rewarding NTRI with a stock price that reflects its progress over the years.

The crux of Clinton's thesis lies in the free cash flow generating capabilities. Ultimately, Clinton thinks that NTRI could be valued as has as the mid-$30s in a year or so in the event that it remains public. This is based on its possible cash flow generation and current balance sheet strength.

Although the PE interest might be there, for a 4% free cash flow yield, we're not willing to pay up for the potential buyout. We're on pause with NTRI, noting the competition and alternatives available when it comes to weight management. Recall that other weight management favorite , Weight Watchers, whose stock has been cut in half in the last two years. It's also worth noting that Clinton owns just under 1.5% of NTRI.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.