Published:
June 27,
2007
If you've seen one of NutriSystem's (Nasdaq: NTRI,
$63.95) commercials, you may
already be familiar with the company -- which is a leading
purveyor of pre-packaged food targeted to those seeking to lose
weight.
For those interested in dieting, but lacking the time to buy and
prepare the appropriate meals and correct portion sizes,
NutriSystem removes all of the hassle. All meals and snacks are
delivered right to customers' front doors and require little
preparation to eat. And unlike Weight Watchers (NYSE: WTW),
NutriSystem clients pay no membership fees and don't have to
visit a center -- all counseling is done online.
In recent years, the company has made great strides against
rivals like Jenny Craig. In fact, the company's customer base
jumped seven-fold in 2005 -- swelling from roughly 50,000 to
nearly 350,000. And last year it more than doubled, climbing to
more than 800,000.
Meanwhile, revenues per customer have been marching steadily
higher as well and now stand at $646 per person. As you might
expect, the addition of hundreds of thousands of new customers
willing to pay more and more for their meals has spelled
sensational revenue growth for NutriSystem.
Since 2003, annual revenues have skyrocketed from $23 million to
$568 million -- an impressive +193% compounded annual growth
rate (CAGR). More importantly, operating income has improved
from a net loss to a gain of $132 million over that same time
frame.
As with any fast-growing company, there is always the
possibility that sales growth might hit a wall, but we view that
risk as minimal over the next few years. Roughly two-thirds of
all American adults are considered overweight or obese, and more
than 60 million are actively dieting -- a huge potential market
that is projected to grow even larger over the next decade.
With less than one million customers, NutriSystem has tapped
only a fraction of that marketplace and has plenty of room to
grow. The most common factors cited for dieting failure are lack
of time and lack of structured meals -- and NutriSystem's
pre-packaged meals and snacks address both of those concerns.
Furthermore, the company's frequent success stories should
continue to drive referrals.
Meanwhile, customer acquisition costs have leveled off, and
gross margins expanded from 52% to 55% last quarter. As a
result, the company was able to turn a +62% revenue increase
into an impressive +70% jump in net income. And for the
remainder of the year, management has just boosted its guidance
and is now anticipating earnings of up to $3.46 per share --
trouncing Wall Street's $3.07 target. Beyond that, the company
is targeting long-term annual earnings growth of around +20% or
higher.
Aside from the robust growth projections, we should also point
out that NutriSystem boasts superior returns on equity
(ROE). While that particular metric can sometimes be skewed by
debt (which lowers equity and inflates ROE), NutriSystem is
entirely debt-free.
Typically, companies with triple-digit growth rates and highly
optimistic outlooks trade at exorbitant prices. However, even
after skyrocketing +1,164% in 2005, NTRI still trades at a
reasonable Enterprise Value/EBITDA ratio of 12 -- and is well
below its fair value of $78.
While the bar has been set pretty high, we think NTRI can
deliver. And when it does, those shorting the stock could get
squeezed as other short sellers scramble to close out their
positions, pushing the shares even higher.
Given the high expectations surrounding the company, we would
demand a considerable 25% discount before investing.
Good investing!
Nathan Slaughter
Editor
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Stocks
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