Thursday, January 28, 2010

Nutrisystem is a Big Loser

Nutrisystem (NTRI) shares are in a tailspin. After hitting a high of $33.54 in December, the stock now trades at just $21.20. The decline is accelerating - NTRI has fallen 30 percent year-to-date. It's amazing how quickly moods change. It's easy to forget that a lower stock price means less risk, not more.

In the recent post - Slim Pickings - BUY WTW), Lonely Value recommended Weight Watchers and told prospective investors to "consider Nutrisystem if it's share price gets slimmer." In the intervening 10 days, WTW is essentially unchanged and NTRI is down 16+ percent. We're getting our wish.

Companies with high fixed costs often hemorrhage cash in down times, but Nutrisystem's flexible business model does the opposite. NTRI had $38 million in cash at year-end 2008. Today that figure is nearly $100 million. Despite lower revenues, the company is still profitable. Net income plus falling inventory and receivables have helped build cash. In fact, inventory alone has fallen $30 million in the past year.

Expect this trend to reverse as times improve, but in the meantime, the company benefits from being cash-rich in lean times. Against its $97 million cash balance, Nutrisystem has zero debt. Must be nice!

The company hasn't repurchased shares since mid-2009, but don't be surprised to see them resume if the stock stays down. In addition, the company continues to pay a substantial dividend of 70 cents per year (a 3.3% yield) that costs the company $5 million a quarter. The company's financial flexibility implies that any dividend cut will be purely voluntary, at least in the short-run.

New distribution deals with Walgreen's and Walmart should help reignite revenue growth. The same can be said of Nutrisystem's exposure to the massive (and growing) diabetes market. While investors wait for these initiatives to take hold, they can be comforted by continuing profits (albeit at lower levels), a beautiful balance sheet, and a well-covered, attractive dividend yield.

In short, Nutrisystem has the ability to invest in its business and reward patient investors in troubled times.

With 29.8 million shares outstanding (fully diluted), Nutrisystem currently has a $630 million market value. Analysts expect approximately $1.5o a share in free cash flow for a 14 multiple. Excess cash lowers this even further. Investors are essentially getting a free option on future growth. Either way, there is no premium being paid for NTRI's financial flexibility and superior business model.

I don't know how low Nutrisystem shares will go, but below $20 a share, this lean operator will certainly find its way back into my portfolio, alongside Weight Watchers.

Disclosure: No position.


  1. It seems that Charles Royce is the largest shareholder. Why not Weight Watchers buy this company?

  2. A very good possibility. But there are 2 different philosophies at these companies... management-wise and weight loss-wise.