Associated Press medical writer Marilynn Marchione recently coined the phrase "Big Herba" in an article she wrote about the supplements business. It seems the mom and pop operations of the past have been replaced by companies as slick as those in the pharmaceutical industry. While not nearly as profitable as the drug companies, they certainly merit your investment consideration. I say enjoy Nature's Bounty.

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NBTY & Competitors

Company Market Cap P/S P/B PEG
Perrigo Co. (Nasdaq:PRGO) $2.57B 1.26 3.10 1.10
NBTY (NYSE:NTY) $2.19B 0.94 2.31 1.47
Herbalife (NYSE:HLF) $2.00B 0.87 7.40 0.76
Usana Health Sciences (Nasdaq:USNA) $451.44 1.01 10.54 0.98
Schiff Nutrition (NYSE:WNI) $166.09 0.84 1.50 N/A

Background
NBTY got its start in 1979 under one of its brand names, Nature's Bounty, Inc.; the current name was adopted in 1995. Today, it is a vertically-integrated manufacturer, marketer and retailer of nutritional supplements, selling 25,000 products to its customers. It manufactures 90% of the products that it sells through four operating segments: wholesale/U.S. nutrition, North American retail, European retail and direct response/e-commerce. Together these four divisions did $2.18 billion in sales in fiscal 2008 with the wholesale business generating over half of total revenue. This is a big business that is getting even bigger. (Make smart investments by spotting up-and-coming success stories early, read 3 Secrets Of Successful Companies.)

Decent Growth
Sales in the last five years have grown from $1.65 billion in fiscal 2004 to $2.18 billion in fiscal 2008. That's a 7.2% compounded annual growth rate. Unfortunately, on the income side, it's been up and down. In fiscal 2005, the company made just $78.1 million in net income. Two years later, its net income was $207.9 million. While there is one quarter remaining in fiscal 2009, it's a good bet that net income will be less than fiscal 2008, somewhere around the $100 million mark. Why is this happening? Because NBTY's wholesale gross profit margin is considerably lower than either its retail or e-commerce segments, lowering its third quarter gross margin by 600 basis points to 45% from 51% the year before. This definitely needs fixing. Herbalife, its biggest competitor, has an operating margin of 13.7%, more than 500 basis points better than NBTY.

Blew the Door Off Earnings
NBTY's Q3 earnings excluding impairment charges and IT write-offs beat analyst expectations by 80%, 90 cents compared to the projected 50 cents. Third quarter revenue jumped 22% to $652 million from $535 million. Most impressive was its adjusted EBITDA, which increased 25% to $109 million from $87 million in the same quarter last year. Last July it paid $370.6 million to buy Leiner Health Products. With its acquisition fully integrated, the wholesale business is experiencing significant growth in revenue and market share, growing by 40% in the third quarter alone to $396.2 million from $283.6 million in Q3 2008. This outstanding performance led Wedbush Morgan in June to upgrade NBTY from "hold" to "buy," suggesting its acquisition of Leiner will make and save it money. In addition, Wedbush set a new target price of $30, which the company has passed, up 126% year-to-date. (This measure has a bad rap, but it's still a valuable tool when used appropriately, for more, read EBITDA: Challenging The Calculation.)

Bottom Line
NBTY has a lot going for it. Investopedia's Glenn Curtis said as much in his November 2008 article about the trend towards healthy living. Although he was talking about Herbalife, I think the same is true for NBTY. Despite sporadic results year-to-year, it's been able to grow its book value per share 17.7% over the past 10 years. I don't know about you, but I'd call it a nature's bounty. Here's to healthy living!

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