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Bull/Bear Report -- NutriSystem (NTRI) Feast or Famine Ahead?

One lesson our bloggers at InvestorPlaceBlogs seem to understand is that the market ebbs and flows in parallel with the business cycle. When the economy is strong, growth stocks tend to do very well. When the economy weakens, those growth stories tend to do poorly.

With the United States economy in or near a recession, depending on who you listen too, growth stocks have been pummeled. Beginning in October of last year, the biggest losers were stocks that were growing the fastest during this last business cycle.

One of those stocks is former high flyer NutriSystem (NTRI). This weight management and fitness program with its pre-packaged portioned meals grew to prominence out of the last recession in 2001.

A focused plan and a strong economy propelled this former single digit stock to huge returns for its shareholders. Hitting a peak of nearly $80 per share NTRI was the poster boy for momentum stocks and explosive growth stories.

With stock now trading down in the 14's, what does the future hold for NTRI?

That growth resulted in a nosebleed valuation that was vulnerable to any weakness in the economy. Given that the average business cycle is 4 years investors should have been worried as signs of a US slowdown began to appear in 2007.

Sure enough, cracks in the NTRI story began to unfold about mid-year. Like other companies before it success at NTRI bred competition. That combined with a potential end of the business cycle sent shares falling and they have not stopped falling since.

Unfortunately the bigger they are the harder they fall. NTRI now trades for less than $15 per share. Frankly the story was fairly predictable and investors should have seen this coming.

The question now is where do we go from here? Value managers and contrarians love to buy fallen angels like NTRI and some are doing just that. Is now the time to buy NTRI or should we avoid this story like the plague?

Bloggers seem to have a definitive bearish opinion on the story and I will aggregate a few of those comments to make the bear case. As for the bull, I had a hard time finding many positive views on NTRI so I will interject some of my opinions into the long case.

The bottom line seems to be that there are better opportunities in the market. I'm not so sure as there are some interesting things to like about NTRI at current levels. Only time will tell.

Bear Case - Aggregate

Several of our bloggers weighed in when NTRI was posted as our Question of the Week. Here's a sampling of their comments.

Russell Krull of the blog RD's Picks had this to say :
This has all the makings of a value trap. Low single digit PE, but - as noted in the question - disappointing guidance and cautious outlook. The PE may expand, but it's more likely to expand on falling earnings than higher share price. This doesn't seem like the kind of business that will do well in a slowing economy. If the budget gets tight, the Nutrisystem plan is pretty high on the list of expenses that get cut and pretty low on the list of new things to sign up for. There are just too many better choices than sinking money in NTRI.

John Reitmeier from Warriorofthelighpicks wrote :
Forget the fundamentals and technicals. When the CEO of the company announces that he is cautious, thats all I need to know. I would sell the stock right here if I owned it.

Uncle John of Uncle John's Cabin added:
I'd have to agree with most of the other comments. Expensive diet systems are usually a discretionary item (which might be sad when fast food is now a staple.)

So, yes, I see a real slow down with this company. Other than the recession/inflation fears leaving less money in people's pockets for this I have one more observation.

Diets rarely work. Expensive diets work even worse. As soon as people lose the weight and get off, they typically regain it faster then they lose it do to thier lifestyles.

I can't believe I'm going to quote Richard Simmons but "it's not a die-t, it's a live-it!" lifestyle, activities and good eating habits for life are what keep people fit. Not paying $20 a day for prepared meals delivered to your door for 3 months.

Walking away from this stock is a completly viable option. There are plenty of better stocks to own at this time.

Ahknahten from Maybe a Pine Tree chimed in with:
Why must people always ask about momentum companies that have fallen like people figure skating uphill? (Thanks Blade) My valuation gives NTRI a target price of $12, and with the high short interest and high F-score, I'll avoid this one. Sell it. I'm not one to look at analyst reports as I try to come up with my own ideas, but I heard something that made me laugh and I think it's a good comment. In a Broadpoint Capital report they stated, "Having a Buy rating on this stock has been much like having a javelin through our head". I would certainly agree. Note to Broadpoint -- check out F-scores, you may have avoided it in the first place.

Bull Case

The Bull Case on NTRI comes from rstack over at goodwill hunter, who wasn't completely sold on the stock, but could see some glimmers of hope.

The only thing losing weight at Nutri System is the stock price. Let's look and see what going on, first the charts. The stock is extremely over sold which favor the long trades. I'm expecting the pull back to stop at @ 5-12 dollars a share. Then go sideway's until the business model is fixed or replaced. The effects of Alli on Nutri system are staggering. Nutri System could be facing negative growth in 2008 .Customer acquisition cost up 50%ytd. It seems that NTRI should form some kind of relationship with Alli or Trim spa or green tea. Subway has their guy -- I'd like to see William "the refrigerator" Perry on a commercial. Better do something fast or the CEO is going to go on the best diet in the world poverty and starvation

Goodwill hunter seems to be making the case that if you have a longer time horizon, now may be a good time to be accumulating NTRI. That would be my opinion.

This company is a cash machine in a market that is exploding. Obesity is a major problem and if we ever do fix our health care system to be more preventative then companies like NTRI would likely benefit. I would much rather see people given incentives for losing weight and there is a chance that with a new administration some of these incentive based ideas might be implemented.

NTRI is struggling because of competition, but the real problem is the economy. Paying for pre-packaged food is a luxury item that many people cannot afford. If there was any strength in the economy, NTRI would be growing like a weed. Value managers like to buy stocks like this as they understand that the economic cycle will eventually favor their position. I think that is the case with NTRI and I would be bullish on the stock.

The company now trades for just 5 times trailing earnings and 6 times forward earnings. They have over $42 million in cash and there is no debt on the balance sheet. Yes NTRI is a falling knife, but the fundamentals are really attractive.

The last sell-off was excessive in my book and provides an excellent opportunity to acquire shares. I think patient investors, not traders will be rewarded in the long run.

So there you go. I like the stock as I'm addicted to value opportunities like this. I can appreciate the bear case and there are plenty of reasons to be bearish. The contrarian in me suggests that the overwhelming bearishness may be a signal to buy, but that is just one man's opinion.

Jamie Dlugosch
Executive Editor,
InvestorPlaceBlogs.com

Posted on February 29, 2008 6:54 PM | Permalink

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Bull/Bear Report -- NutriSystem (NTRI) Feast or Famine Ahead?

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