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NTRI surged 9% yesterday after beating earnings – should you jump on board?

NTRI surged 9% yesterday after beating earnings – should you jump on board?

So far this week stock market has managed to bounce off of support and rally pretty strongly after touching its lowest point since May on Monday. In the last three days the S&P 500 has rallied about 5% higher, using strong earnings reports as a primary driver, along with optimistic comments from President Trump about the chances of reaching a compromise on trade with China even as his administration has started to plan tariffs on all remaining Chinese imports if talks fail later this month.

Is the market set to reclaim its losses from the worst October in a decade? Maybe; the S&P 500 used the 2,600 level as a pretty strong support point this week, and that’s a level I’ve been watching all year long as a signal point for deeper troubles ahead. Until the market breaks that level – something that it has failed to do a total of four times since January of this year – I’m not prepared to call for a deeper correction, much less a bear market. It still isn’t a good time to jump wholeheartedly back into the market yet, however, simply because bearish momentum remains high, and I believe investor’s nerves are becoming more and more frayed all the time. To me, that means that the market is going to remain volatile, and a new round of fresh bullish optimism will be hard to justify until clearer bullish signals are seen.

One of the stocks that enjoyed a big boost in Thursday’s session was NutriSystem Inc. (NTRI), a stock that has been severely beaten down since July of 2017, but managed to beat earnings forecasts in its latest quarterly report. That gave investors a reason to start pushing the stock from around $33 as of Tuesday’s close to just a little below $39. That’s a jump of nearly 17.5% in two days – enough that it should make anybody sit up and take notice. A pure momentum investor would probably look at that jump, and the stock’s strong push off of support, as a good indication that the stock is about to reverse its current downward trend and stage a brand new rally to reclaim the losses that have mounted over the last 16 months, and there is a pretty good technical basis for that conclusion; but does the fundamental data back it up? Even if it does, an equally important question is whether you believe broader market conditions are going to be conducive to give this small-cap stock the ability to to create that trend? Let’s dive in and take a look.



Fundamental and Value Profile

Nutrisystem, Inc. is a provider of weight management products and services, including nutritionally balanced weight loss programs, multi-day kits available at retail locations and digital tools to support weight loss. The Company’s program customers purchase monthly food packages containing four-week meal plan consisting supply of breakfasts, lunches, dinners and snacks and flex meal plan recipes, which they supplement with fresh fruits, vegetables and dairy. Its customers order on an auto-delivery basis (Auto-Delivery), where means it sends a four-week meal plan on an ongoing basis until notified of a customer’s cancellation. The Company offers its pre-selected favorites food pack or personalized plans, where customers can hand pick their entire menu or customize plans to their dietary preference. As of December 31, 2016, its meal plans featured over 150 menu options at different price points, including frozen and ready-to-go entrees, desserts, snacks and shakes. NTRI’s current market cap is $1.1 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings grew 10%, while sales were mostly flat but still positive at a little less than 1%. The picture is less favorable in the last quarter, as earnings dropped nearly 38% while sales were almost 17% lower. An interesting contrast comes from the company’s margin profile, were Net Income as a percentage of Revenues improved in the last quarter to 10% versus 8% over the last twelve months. That’s a pretty healthy number for a retail sales company that relies primarily on Internet and direct marketing for its revenues.
  • Free Cash Flow: NTRI’s free cash flow is healthy given its small cap status, at a little over $61 million. It increased in the last quarter from about $50 million.
  • Debt to Equity: NTRI has a debt/equity ratio of 0 and operates with no debt. This is a characteristic that translates to very little financial risk for the company; it is something that has enabled them to build a solid position of cash and liquid assets of nearly $93 million steadily from less than $20 million at the beginning of 2016.
  • Dividend: NTRI pays an annual dividend of $1.00 per share, which translates to an impressive yield of about 2.58% at the stock’s current price. This is even more remarkable given the fact that few small-cap stocks pay any dividend at all.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for NTRI is $4.44 and translates to a Price/Book ratio of 8.72 at the stock’s current price. By itself, that is a high number, and it is something that naturally gives me pause since my preference is to see this number closer to 1. I am willing to work with stocks that trade at multiple above 1, however if their historical Price/Book ratios are still above the current level, and that is the case for NTRI; their historical Price/Book ratio is 10.34. The stock is also trading about 25% below its historical Price/Cash Flow level, which along with the Price/Book ratio provides a long-term price target in the $45 to $48 range. That’s 18% to 25% higher than the stock’s current price.



Technical Profile

Here’s a look at the stock’s latest technical chart.

 

  • Current Price Action/Trends and Pivots: The stock has been following a clear downward trend since late December of 2017 and remains almost 30% below that high point, even with the stock’s recent, impressive two-day run. Immediate resistance is around $43.50, with strong support in the $33 to $35 price area. The stock will need to break above the $44 mark to offer any kind of sustainable upward trend, no matter what broader market conditions are doing, which a drop below $33 could point to an new test of the stock’s trend low around $26 from April of this year.
  • Near-term Keys: If you want to be speculative, the stock’s two-day rally is big enough that it could provide some basis for a short-term trade using call options with $44 as a target price. The smarter approach would be to wait to see if the stock can break above $44, and then look for an opportunity to ride what should be a pretty interesting short to intermediate-term trend at that point. A bearish play carries a very low probability right now; the stock would need to drop below $33 to offer any kind of reasonable basis for making a short trade or buying put options. What about the long-term value proposition? To be frank, this is a stock with a very low Book Value relative to its current price, and that makes me a little nervous despite the overall fundamental positives and the market’s apparent willingness over the last few years to price this stock at a big premium to its Book Value. I would prefer to the see the stock trading at a lower multiple, either by retreating closer to its current value or by increasing its Book Value before I would take a long-term position on this stock seriously.


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