Wednesday, July 25, 2007

NutriSystem Inc. (NASDAQ:NTRI): Expect the stock to bounce

- NutriSystem Inc. (NASDAQ:NTRI) reported a higher quarterly profit mainly on growth in its core women's market but guided third-quarter below analysts' view, sending its shares down over 15 percent in after-market trade. In a conference call with analysts, the fitness products company said it saw some slight softness in demand starting in late June and carrying into early July. The launch of a new over-the-counter weight loss pill from GlaxoSmithKline Plc has had an effect, it added:

- First Albany notes that while they are disappointed to see the aftermarket action in NTRI shares, they are relieved to see more cautious guidance than management offered for 2Q:07 (granted, which it went on to beat.) Aggressive 2Q:07 guidance no doubt created momentum and expectations for 3Q:07 that were unrealistic.

NTRI shares will likely be very weak today on 3Q:07 guidance perceived as weak. However, financial and operational trends evident in 2Q:07 results speak of exceptional fundamentals. Revenue, gross profit, operating income, EBITDA, and net income exceeded firm's forecasts by 8%-12% each. First Albany's 2007 revenue and EPS estimates go to $826.4 million and $3.49 from $800 million and $3.39. respectively. 2008 revenue and EPS estimates go to $1.062 billion and $4.55 from $953.5 million and $4.01, respectively.

Also, NTRI trades like a fad diet, when in fact, it's a viable weight loss service. NTRI shares currently trade at approximately 14x 2008 EPS estimate (and may open today at 12x) vs. 17x for a peer group and 18.4x for Watchers International (WTW). NTRI's P/E/G ratio is 0.5x vs. 1.2x for the peer group and 1.3x for WTW.

Firm notes they don't know when the market will reward NTRI the premium multiple it deserves vis-à-vis WTW, but they can't see NTRI shares trading ata sub-0.6x PEG ratio if the company achieves 2H:07 expectations.

Maintains Buy and $75 tgt.

Notablecalls: This stock is cheap compared to its growth rate. You have a momo stock trading 12-13x next years EPS this morning. I suggest you grab it.

Not only is it cheap, it has catalysts ahead: 1) The men's & seniors' line is still in its infancy 2) NTRI is only starting its Canadian expansion 3) They are coming up with new kinds of foods.

NTRI has been around over 25 years. It's not a fad. It does not deserve the discount vs. other diet plays that are growing WAY slower.

I would pay $56 for it this morning and have a big smile on my face. It's going to bounce! I think the stock remains in Actionable territory until $58-$59.

PS: I'm hearing Lehman is out with a downgrade on NTRI taking their rating to Equal Weight from Overweight. That's just stupid but may get you a nice price early on!

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