Shares of Nutrisystem, Inc. (NTRI​) rose 10 percent in the days leading up to June 14, recovering losses sustained the previous week after following analyst downgrades. For some market-watchers, this would indicate that technicals were driving the move, or potentially a relatively large holding taking a position at a discount to prior-week pricing.

Nutrisystem stock was buffeted by poorly received first quarter earnings in April. Overall, the shares are up 47 percent year to date, primarily due to strong performance in February and March. The newest round of optimism might motivate active value investors to assess their positions because it is unlikely that the shift in valuation was accompanied by a similar change to fundamentals.

Chart showing Nutrisystem, Inc. (NTRI) revenues over the past decade

After struggling to maintain its top line from 2008 to 2013, Nutrisystem has found renewed strength. The company reported double-digit sales growth in three straight years, with an average annual rate of 15 percent through 2016. Revenues increased 31 percent in the first quarter of 2017. The company is attributing this expansion to its multi-brand approach, new product roll-outs, feature improvements and superior customer acquisition strategies. Analysts expect sales growth to moderate slightly but remain above 12 percent for the next two years. (See also: Why Nutrisystem Could Be an Impressive Growth Stock.)

Chart showing Nutrisystem, Inc. (NTRI) gross margin over the past decade

Nutrisystem's gross margin performance has progressed similarly to the revenue line. After rising as high as 55.9 percent in 2010, gross margin hit a 10-year low in 2012 at 46.3 percent. The company has delivered improvements since that time, with first quarter 2017 gross margin hitting 53.8 percent. This was a year-over-year improvement of 230 basis points. Gross margin expansion has been attributed to better pricing and improving food costs.

Chart showing Nutrisystem, Inc. (NTRI) margins and returns over the past decade

The corresponding trends in revenue and gross margin have had a predictable impact on the bottom line. Operating and net margins tumbled into negative territory in 2012 but have since recovered to closer to the pre-decline levels. Operating margin rose to 9.9 percent in 2016, and it improved 208 basis points in the first quarter of 2017. Net margin over the trailing 12 months equaled a decade high at 6.7 percent after rising 195 basis points in the first quarter. (See also: Nutrisystem Shares March Higher: Can It Continue?)

Chart showing Nutrisystem, Inc. (NTRI) profit metrics over the past decade

Operating profit has risen steadily, and free cash flow has trended upward as well. Free cash flow totaled $596 million over the trailing 12 months, the highest level since 2008. The trend in free cash flow indicates high earnings quality because the rising profitability is reflected both in accounting and cash generation.

Chart showing Nutrisystem, Inc. (NTRI) efficiency ratios over the past decade

Table showing Nutrisystem, Inc. (NTRI) operating metrics compared with its closest peer

Nutrisystem's efficiency ratios have trended in a generally positive direction in recent years, although the improvements have not been universal. Asset turnover rose from 2.67 in 2011 to 3.86 in 2015. The ratio stalled and shrank very slightly since that point. Despite the falling ratio, Nutrisystem has a wide asset turnover advantage over fellow weight-loss system peer Weight Watchers International, Inc. (WTW). Nutrisystem's inventory turnover has trended steadily upward and currently sits at a 10-year high, indicating superior inventory management. The company's days sales outstanding has crept upward over time, indicating less efficient cash collection, but this has been offset by a rising payables period. (See also: Why Are Efficiency Ratios Important to Investors?)

Chart showing Nutrisystem, Inc. (NTRI) financial health metrics over the past decade

Nutrisystem maintains strong financial health metrics. The company's financial leverage is manageable, and its equity multiplier is 1.9. For comparison, Weight Watchers has negative book value, so all of its financing is currently debt. Nutrisystem has the ability to take on additional debt if management decides that it would be beneficial to alter the capital structure to seek the cheapest financing. The company's liquidity ratios have been stable since 2013. A current ratio of 1.56 is adequate, and its quick ratio is also safe at 1.07. (See also: What Is the Best Measure of a Company's Financial Health?)

Table showing Nutrisystem, Inc. (NTRI) relative valuation compared with its closest peer

Investors must pay a premium for Nutrisystem because of its growth outlook and financial health. Price-to-book-value is 15.2, which is relatively high. Nutrisystem is much more expensive than Weight Watchers on the basis of price-to-earnings, forward-price-to-earnings, price-to-free-cash-flow and enterprise-value-to-EBITDA. The expensive appearance of the stock is tempered by a PEG ratio that is very close to that of Weight Watchers, and Nutrisystem also pays a dividend, unlike its close peers. However, neither the PEG ratio nor the dividend yield are particularly attractive relative to stocks in other sectors.

Chart showing Nutrisystem, Inc. (NTRI) EV-to-EBITDA history over the past five years

Chart showing Nutrisystem, Inc. (NTRI) price-to-free-cash-flow history over the past five years

Nutrisystem's valuation metrics are also somewhat high relative to its own historical levels, which is evident when considering EV-to-EBITDA, dividend yield and forward P/E. Optimism in 2017 has made Nutrisystem expensive. The valuation is not recklessly high at this point, but strong performance in the medium term is already priced into the stock. Nutrisystem stock could still be a great position for bullish investors seeking exposure to weight-loss services, but holding it necessarily implies continued strong performance. (For fundamental analysis of Nutrisystem's close peer, check out: Time to Sell Weight Watchers After 103% Year-to-Date Gain?)

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