NutriSystems Feels the Holiday-Related Selling

NutriSystems Inc (NTRI) is starting its "holiday drop" right on time this year.  There is no news out today, but shares have sold off right from the open to down about 6% to a $69.00 handle.  Last year during the month of December NTRI saw its stock drop about 25% around the same time, although the NTRI performance track record of 2006 is mush different than 2005.

The reasoning behind this may be a "holiday drop off" from members and a likely build in inventories at company warehouses due to the holidays.  How many people are out at parties during the holidays saying they can’t have that last chicken wing or last bite of pate because it isn’t in the prepackaged diet meal after their fifth glass of wine?  Probably not that many.  And if New York City, Chicago, and Houston are good barometers for the level of holiday parties this year, then you know people are out partying more than watching what they are eating in 2006.

There is a direct comparison that could explain this.  On Monday December 12, 2005 the company closed at $43.59, but saw its shares slide to $33.76 by the end of the year.  It only took the stock until January 12 to recover all the back and then some when it closed at $44.96. 

Now shares even after the drop are still up 40% from there after seeing $70-handles in the stock.  The 52-week trading range in the stock is $32.37 to $74.24, so it isn’t without volatility.  This looks like a seasonal play more than anything.

The key difference in 2006 and 2005 is that in 2005 this stock went from under $5.00 to over $40.00.  It is a more mature company now, so the price whips may not be as wide in percentage terms as long as there are no hidden unknowns out there.  Today’s move still looks like it is a seasonal trading pattern more than anything sinister.  That doesn’t mean it can’t impact earnings and that it won’t cause any hiccups in the forward models, but this still looks like the start of a seasonal trade more than anything massive.  Diet stocks often run into trouble at some point as history proves most diets are fads, so always keep that in mind.

NTRI now has a market cap of $2.45 Billion and has a trailing P/E of 36.  Analysts are looking for $2.23 EPS in 2006 and $3.10 in 2007, so the street itself is still looking for growth.  Who knows for sure, but maybe all the great parties from 2006 are setting the company and the diet sector up for a good 2007……..

Jon C. Ogg
December 11, 2006