Wednesday, March 16, 2016

49th AIM Student Equity Update by Robert Uhland. Nutrisystem (NTRI). “A Closer Look at One of the Players in Weight Loss”

NTRI (Nutrisystem, Inc.): New Year, NuMi

By: Robert Uhland, Student Analyst at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

• Opportune New Frozen Warehouse in Illinois to provide the backbone for forthcoming operational and logistical efficiencies.

• Strong momentum generated by advances in program features and a sundry product selection with the progression of NuMi and concurrent launches of both the DASH diet and Turbo 10 in late December 2015.

• Synergies from recent acquisition of South Beach Diet Brand lend to key Direct and Retail Channel growth initiatives moving forward.

• Proclivity towards obesity is set to rise significantly moving out to 2020 and on with billions of dollars consumed each year in an attempt to curb this trend.

• Novel Shake 360 offering provides conduit through which to expand NTRI’s Health and Wellness Segment.

• The newly minted management has fixed declining top and bottom line growth spurning nine consecutive quarters of revenue growth through a multitude of levers.

Nutrisystem, Inc. (NYSE:NTRI) has the ability to deliver sustainable double-digit growth for the next few years through its differentiated value proposition and rapidly expanding retail footprint. Currently, trading at $19.60, NTRI offers a remarkable opportunity and entry point through which to penetrate an industry set to grow exponentially moving forward. NTRI has been able to maintain an edge over its competitors like Medifast, Weight Watchers, and ConAgra Foods in the weight loss industry due to its ability to be a market-altering, trend aware business with significant capital put forth into sustainability.

With overweight and obesity rates set to rise significantly (2020 estimates: 80% of males, 70% of females, and 20% of children) and health spending destined to increase, NTRI seeks to alleviate the associated risks by invigorating the consumer weight loss experience through its differentiated products and services. Additionally, the company’s new warehouse expansion increases its capacity by 60% and enhances customer satisfaction with 99% of customers expected to receive orders within 2 business days versus the prior 80%. Furthermore, the acquisition of South Beach Diet Brand in December 2015 aligns well with NTRI’s intent to ramp up SKU counts, strengthen Direct and Retail brand exposure, and intensify efforts toward Type 2 diabetes.

The weight loss industry remains largely untapped, with rates only set to rise moving forward. Introductions of the Shake 360 initiative, the first probiotic nutritive shake offering by the company, and Turbo 10 are poised to capture significant market share for NTRI following suit with the diet season as we head into the spring and summer months. Driven by robust growth, I am confident in the newly minted management to soar to new heights.

 What has the stock done lately? Over the past three months, NTRI is down 12.48% and has taken a hit in a depressed weight loss industry. The company reported Q4 2015 earnings on February 25th, coasting in line with earnings and beating on revenues. For FY 2015, NTRI revenues increased by 15% year-over-year and earnings hiked up by 35%. As of recent however, investors are spooked due to soft guidance for Q1 2016, but I expect the stock to rally off NTRI’s brilliant management propelling pioneering services, coupled with positive FY 2016 guidance with projected revenue and earnings beats.

Source: FactSet

Past Year Performance: Over the past year NTRI is up 6.53% and is down 9.57% YTD. Thrust by its compelling brand presence in the weight loss industry, NTRI has delivered supreme numbers over its peers. The company has taken the brunt of the Weight Watcher’s downfall over the past three months; however, with Oprah as the spokeswoman for Weight Watchers this should prove to be a positive halo effect for the weight loss industry as a whole.

Source: FactSet

My Takeaway
With obesity set to reach record highs moving forward to 2016 and on, coupled with record highs in consumer confidence, spending, and disposable income, and topped with exceptionally depressed oil prices, NTRI is in a position to generate favorable returns. As NTRI heads into this diet season, I anticipate the price to trend up to around mid-$24 range or higher. The company has shown superior numbers since management was rescinded in 2013, with top and bottom line skyrocketing by +26% and +99% respectively. 

You should hitch up with Nutrisystem before the company takes flight over its peers led by macros that are poised to exponentially increase and exhaustive expansionary efforts on the verge of coming into fruition. With a strong track record of beating earnings fueled by a brilliant management team, substantial organic and inorganic growth opportunities, and strong tailwinds levered through a multitude of strategic partnerships in both Direct and Retail, I strongly believe that NTRI is undervalued and is trading at a discount. I foresee the company continuing to grow moving forward as NTRI continues to capture market share, improve margins through efficiencies with the expansion of warehouse capacity, and expand its strategic initiatives and robust product line. Taking into consideration the aforementioned drivers, I feel that NTRI is an overlooked growth play in a groomed weight loss industry.  

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