NutriSystem - Right Idea, Wrong Stock

By James Brumley | May 03, 2011 AAA

At first glance, NutriSystem's (Nasdaq:NTRI) first-quarter earnings may put the stock back in a compelling light, not to mention the entire nutrition and weight-management industry. After all, the company beat estimates, and the stock jumped 8% the next day.

But if you take a closer look at the actual results, you may be far less impressed with NutriSystem than traders were on Thursday. Worse still, its competitors may be struggling too. However, before writing off all weight-loss stocks along with NutriSystem, a closer look at the numbers suggests there's opportunity here, but it's not found in NutriSystem.

TUTORIAL: Risk and Diversification

By the Numbers
The good news is that NutriSystem didn't lose the 30 cents per share in the first quarter of this year analysts thought it would. The bad news is, it still lost 12 cents per share, which was well short of the 16 cents per share it actually earned in the same quarter a year earlier.

So how does a stock lose 12 cents in a quarter and still pop like that? The worst-case scenario for the quarter was priced in back on February 25th, when the stock plunged from $20 to $14. The latest number were not as bad as expected, and provided the stock with a llittle relief after being released.

While the loss itself isn't exactly a positive, it's nothing unheard of either. Companies lose money sometimes when times are tough. In this case, the loss included six cents' worth of a one-time charge. The real red flag here is on the revenue line, where sales fell from $158.8 million in Q1 of 2010 to $132.7 million this year - a 16% decline fueled by deliberate price cuts back to 2003 levels.

Although the market saw a glimmer of hope behind the tactic, it's worth noting that NutriSystem has been losing revenue each year since 2007. Moreover, it's the third straight Q1 that the company has earned less than it did a year earlier. Translation: even if price cuts were a long-term solution (which they're not), there's something else chipping away at the company's viability here.

Could it be the industry itself? Are cost-conscious consumers just not interested in paying a premium any longer for weight-management solutions? Unfortunately, that doesn't appear to be the problem - other companies in the same space are doing fine, and appear much more investment-worthy than NutriSystem does.

High-Performance Weight-Loss Names
It's not that there's no profit or growth in the nutrition and weight-management space. There is. As is always the case though, execution is half the battle.

Investors turned off by NutriSystem may want to try Schiff Nutrition (NYSE:WNI). This maker of supplements and nutrition bars has not only been in the habit of beating estimates, but unlike NutriSystem, it's also actually growing income again. In fact, fiscal per-share profit for 2010 was 64 cents, a record, and the company's on pace to reach 56 cents per share in the current fiscal year. That profit number assumes it won't beat its current-quarter estimates, which would come as a surprise since this company has a history of beating estimates.

One could argue that its nutrition bars and supplements, marketed under names like MegaRed and Tiger's Milk, don't quite go head to head with NutriSystem's food products, and therefore don't make for a fair comparison. However, there's quite a bit of overlap in each company's target market.

The same can be said of Herbalife (NYSE:HLF), a distributor of a variety of health shakes, supplements and healthy personal products, but no actual food. It's the same target market NutriSystem is gunning for though, and is indeed comparable competition.

More important, Herbalife has continued to grow its bottom line - even during the recession - with almost embarrassing consistency. The extent of its woes was felt in 2009 when income fell from $3.53 in 2008 to $3.28. It was a short-lived challenge though, as 2010's $4.77 was an all-time record profit; 2011's should be even better.

The secret to Herbalife's success isn't exactly a secret. The company simply offers a complete and multi-faceted (with multiple integrated product lines) weight-loss and lifestyle solution.

Finally, Weight Watchers International (NYSE:WTW) undoubtedly has the strongest name in the business. Unfortunately, it also has one of the highest P/E ratios in the business, trading at 30 times trailing earnings and 21 times is forward earnings. And, it doesn't really have the strongest track record of earnings growth to back it up.

The Bottom Line
The nutrition and weight-management industry is still viable and investment-worthy, just not indiscriminately so. While NutriSystem migth not have the profitability investors are looking for, some of its competitors are on pace to provide healthy returns. (For related reading, also take a look at What Obesity Is Costing You.)

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