Nutrisystem: Diet Dollars

08/30/2013 8:00 am EST


Glenn Rogers

Contributing Editor, Internet Wealth Builder and The Income Investor

The Centers for Disease Control and Prevention has indicated that over 60% of the US population needs to reduce their weight. That's a huge market in more ways than one, asserts Glenn Rogers; the contributing editor to Internet Wealth Builder looks at one player in the diet field.

Nutrisystem (NTRI) has been in business for over 40 years, and provides its clients with a complete menu, along with counseling, online tools and applications, along with cookbooks and complete meal planning.

Currently, its two celebrity spokespeople are Dan Marino and Marie Osmond. Since most of the company's revenues are from direct consumer sales, well-known celebrities, plus a heavy marketing spend, have been features of this operation.

Recently, the company released its second-quarter financials to June 30. Revenues for the quarter were $97.5 million (with operating income of $9.8 million), both of which, were in line with the company's expectations, although revenue fell short of analysts' predictions. EBITDA for the quarter was $13.5 million.

The company has no debt, other than standing bank arrangements, so it appears to be in a position to continue to pay the hefty dividend of $0.175 per quarter ($0.70 annually). They also increased their guidance for the rest of this year.

The new CEO, Dawn Zier, reported that earnings increased by 57%, driven by continued gross margin improvement and scaled back marketing costs.

The company is now focused on growing revenue as well as continuing to improve margins. The danger with that approach is that they will end up scaling back their marketing budget too much—it's a fine line.

The stock performance over the last few years has been spotty. It peaked at $70 per share in 2006-07, and then followed the rest of the market down in 2008-09. The last couple of years have been pretty dismal with the shares trading sideways to down.

However, the stock has been trading very well for the last few months, and with a dividend yield of 5.5%, it looks like it will continue to run, even though the shares are starting to look very expensive on a p/e basis.

I don't normally like buying into companies that are this pricy, but Nutrisystem recently announced a new partnership with Walmart, which could be the proverbial game changer for the business. They are now offering their weight-loss kick-start program exclusively at nearly 3,700 Walmart stores.

Citigroup recently raised its price target from $10 to $15, buying into the turnaround story and pointing out that the company only needs a 2% share to become a billion-dollar brand.

This is definitely not a widows and orphans stock; rather, it requires a degree of risk tolerance. But it has been climbing steadily off its lows and the chart looks almost perfect. Action now: Buy with a target of $16.

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