May 2, 2017
Analysts
Jeffrey Joe
Tian Luo
Minhao Gu
HonglinDiao
Nutrisystem, Inc. Recommendation
(NASDAQ: NTRI)Watchlist
Current Price:$53.45 EPS: $1.19
52 Week High: $56.25 Market Cap: $1.59B
52 Week Low: $20.84 Trailing P/E: 45x
Company Profile and Business Model
Nutrisystem is a leading company in the weight loss industry that provides a variety of weight management products and services to consumers through direct and retail channels. The company has been promoting the efficacy and convenience of its products for over 45 years. In late 2012, Nutrisystem changed its management team and subsequently its revenues have grown faster. This is attributed mostly to its successful marketing strategy, continuously innovative products, and good customer relationships. The new management team has developed a better brand image by emphasizing its effective, healthy, and convenient products.Nutrisystem continues to update its products and now provides more than 150 choices.
Macroeconomic and Industry Review
The weight loss products and services industry has seen a recent decline in annual revenues due to increasing internal and external competition. Despite this industry downtrend, Nutrisystem has experienced significant annual revenue growth over the last 4 years. The primary driver for the weight loss industry is the increasing national trend in adult obesity which has been associated with an increasing incidence of Type 2 diabetes. The rivalry in this industry is very high due to low barriers to entry, the introduction of new products and services, and the numerous buyers and suppliers that are available.
Financial Analysis and Valuation
Nutrisystem(NTRI) recorded $545 million in 2016, an average growth rate of 18% year over year. It is the third consecutive year of double digit growth. This growth is largely due to increased spending on TV and digital channel marketing campaigns. Moreover, the company made significant efforts to continuously improve operating efficiency which has led toa higher return on equity. When valuing NTRI, there are two important considerations 1) will the weight loss industry continue tolose market share, 2) can NTRI sustain its competency and take market share from its competitors. With different combinations of these two drivers, we can create three scenarios - positive, mean-reversion, and pessimistic. Under each scenario, the estimated price is no more than $40 with DCF analysis.Currently, the price is $53.45. Therefore, we believe that the market is overvaluing this company.
Recommendation
We recommend that Nutrisystem be placed on the watchlist.