Tag Archives: NTRI

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.

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Nutrisystem

Earnings season certainly keeps me busy. I do my best to listen to all conference calls and try to through in some competitor calls as well. I usually don’t revisit my fair value numbers unless there is significant news one way or the other. The other day Nutrisystem forced my hand after dropping 12% the day after earnings.

I have held NTRI since August of last year. After watching the stock go from 13 to 30 in a few months and not taking profit, I felt pretty stupid. In my defense, I had planned on holding for a few years and was having a wedding and honeymoon at the time. I bought more after the last quarters earnings disappointed. This time earnings were beat but the outlook was cautious.

I heard of NTRI from F Wall Street here. For the record, Joe’s blog is one that should be read in its entirety BEFORE reading this one. I put it on my watch list and eventually pulled the trigger. The company was experiencing insane growth sending shares north of 70. But growth slowed, revenues fell, a recession happened (or is still happening depending on who you ask) and the stock came back to earth. Though EBITDA margins over 10% are pretty good for a company with little or no moat, they were over 20% a few years ago. ROIC is very high. The company has no debt and almost $3/share in cash. A current yield of 3.5%, and earnings and margins are starting to rebound after the recession. The company has done a good  job of improving time to turn over inventory and accounts receivable, meaning they are getting the accounts receivable and inventory turned into cash quicker. They are also taking longer to pay customers, meaning that the cycle to convert the sale of merchandise into cash is getting shorter, that is a good thing.

Notes from Q2 conference call

  • Revenue up 8% vs a year ago
  • Margins improvement
  • Consumer starting to loosen purse strings
  • 31% increase in new customer revenue
  • But cautious outlook
  • Q3 2010, revenue will likely be a smidge lower and new customers will be flat compared to last year, mostly from the comparison to last year when Nutrisystem D was launched
  • Importantly, noticed a real cautious consumer in the last month compared to a trend that started late last year

What we really need to keep in mind with a company like NTRI, is customer captivity or recurring revenue. Most of the sales and advertising expense is to attract new customers. Then once they have them, they need to retain them. The addition of new customers is great, lets hope the retention rate will be high.

Risks

I know, I know, the consumer is dead. But, there are some sectors likely to see continued growth, weight-loss is one of them. More and more people are becoming obese and overweight everyday. NTRI might have some sort of moat, but if they do it is razor-thin. People can do the dieting without NTRI, so that is something to watch for. I don’t think the financial crisis is NTRI’s biggest risk, I think it is internal and external competition. Competition from other dieters (Weightwatchers, Jenny Craig, etc.) or external (pharma, grocery stores, etc.).

Valuation

  • Management has given guidance for earnings this year at around 1.10 per share, giving a forward P/E of 17.7. Not cheap, but if you take cash out, you get 15. A little better.
  • Current EV/EBITDA of 8.4, using 5 yr average EBITDA, you get 4.8
  • My EPV is 30-33
  • DCF, though tough to use, gives me 30.

Summary

I think NTRI has decent tailwinds. I also think that revenue and earnings have seen their trough this cycle. I think that you can buy around 16 and fair value is 30+, providing the economy doesn’t fall off a cliff and management executes accordingly.

Any comments welcome

Dean

Long NTRI at time of writing

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