NutriSystem Update…Unhealthy?

I took a huge hit on NTRI over the last 6 months. The stock is always volatile after earnings as it usually has 30% short interest. The last time the company missed, I added more. This time I am not. I’m out as of today.

Why? Let me explain…

I bought NTRI because I thought it was a fast growing company that had a mis-step that was exasperated by the recession. It seemed that the company was making headway against competitors and the NutriSystem D line was just being launched. Lets keep in mind that NTRI has almost no moat. You can go buy healthy options from the store that aren’t in little packages and honestly it is probably better for you. The internet is full of FREE healthy eating tips and how to monitor your progress. NTRI caters to guys like me…brain off dieting. All this doesn’t mean that you shouldn’t own NTRI, it means you should pay a certain price.

The tailwinds in the industry attracted me. But this industry is extremely competitive. Not only internally from Jenny Craig and Weight Watchers, but externally from pharmaceuticals. I think that all expenditures are being spent to simply maintain market share here. And that the dividend is probably excess cash and maybe even some return of capital.

Some visuals always help…

The graphs show a company that has struggled to reach peak revenue levels. Management will tell you it is “the economy”, and maybe they are right. But NTRI does not have a moat. Earnings beats typically have come from expense reduction, not increased revenue.

It is OK to buy a company with falling margins. Buying a cyclical company during the height of a recession is usually a good investment. NTRI is not a cyclical, and you can see that because revenue has continued to fall even after the recession has ended.

So that leaves you with using assets to try and value NTRI. With price to book at 4.5x, I don’t really have a margin of safety here. I know, the customer relationships are worth something and all that money spent on advertising is worth something. I agree, but what? I don’t know and I won’t speculate.

I failed to realize the impact competitors have on NTRI. As such I have lowered my fair value to $14-15. Not leaving enough margin of safety, I have decided to sell in favor of better opportunities.

I think that it is tough to determine what NTRI will actually earn. It is possible to achieve the 33.9 million (or $1.18/share) in net income. But as witnessed by the company’s last few quarters, if a competitor launches a new product, NTRI must cut prices drastically to maintain market share. Not something I want to pay a premium for.

NTRI also has healthy executive compensation and lack of insider ownership. Two things I am fond of.

I have a revised trigger of under $10 given the risk. As with anything, I would be flexible if there was some more clarity.

Dean

Disclosure: The author has sold NTRI. Given his impeccable timing, you should buy and expect a nice return.

4 Comments

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4 responses to “NutriSystem Update…Unhealthy?

  1. Pingback: NutriSystem Update…Unhealthy? - Petty Cash - B-Hive - WAGGLE

  2. I’m also an investor. Actually I should say I’m still an investor. I also took a huge hit but I’m planning to keep my stock for a while since I consider the company has good potential and a great product, even though competition is fierce and the moat is practically non existent – When I initially invested I actually thought there was a real moat-.

    It’s clear now that this won’t be a great stock but I think that it may not dissapoint so strongly if kept for a long time. Manuel.

    • I agree that the company does have potential. My fear was trying to price the downside. They are in a industry with tailwinds, but also face fierce competition.

      I think it shows how little the marketing and selling expenditures mean when WTW introduces a new product and NTRI has to dramatically differ their value proposition to customers. I’m sure that there is some value to intangible and off balance sheet assets, but what? I can’t be certain.

      With little hard assets and a declining profitability, I decided to lick my wounds and find something I could get more comfortable with.

      Dean

      PS. The fact that I am out should be a vote of confidence. 🙂

  3. chip

    Dean,

    I owned NTRI in 2007, and before buying, doing some scuttlebutt on competition led me to research Alli, a weight loss medication that had just been released to market. One of the main side effects of the medication is loose stools – apparently so much so that a lot of people on this medication carry a few extra pairs of undies just in case. Anyways, I came across this message that was posted by a man on an internet weight loss forum. A tad disgusting, but hopefully you get as good a laugh as I did:

    “OMG…. I have been taking these pills for about 3 weeks and have lost almost 15 pounds. I have done very well following fat intake (for the most part) and have been working out regularly without any sludgy side effects. Then, 3 days ago I was craving some Ben & Jerry’s Cinnabun Ice Cream. I just had to have it as a treat for all my hard work. I figured I would just have a long workout session the following day. So I get to the gym change into my clothes only to find I did not bring any underwear to workout in Unfortunately, I wear long boxers and could not wear them with my gym shorts, so I thought no biggie. I lifted for about 30 minutes and got on the treadmill to run for a half hour, and thats when it happened. I was doing a sprint at about 7.0 after about 15 minutes of running. Forgeting I had no underwear on let (what I thought) was a string of bubble farts slip only to turn around to a group of young ladies screaming at me. Hearing them through my mp3 I take off my headphones and realize I had somehow shat dropping poo on the back of my shoe and on the treadmill and it was getting flicked behind me onto a couple of hotties on stationary bikes and I did not even know it. What the hell …….. Can I just die now!!”

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