While a double-beat quarter from NTRI isn’t unusual (the company has reported multiple double-beat quarters in a row), it wasn’t supposed to happen this time around.
Last quarter, NTRI reported a double beat quarter with 20% revenue growth and 50 basis points of gross margin expansion. That wrapped up a record year wherein revenues were up 28% and gross margins expanded 100 basis points.
But management said that they misfired at the start of the 2018 diet season. As such, 2018 got started on the wrong track, and the balance of the year would be spent trying to get back on the right track. Management gave a down guide, calling for revenues to be flat to down this year and for margins to be under pressure.
NutriSystem stock tanked. From $40 to $30.
Against that backdrop, NTRI wasn’t supposed to report another double beat quarter. But they did. Plus, management sounded a bullish tone on the conference call that the company is back on track, and that revenue growth will come back into the picture in the back half of the year.
NutriSystem stock is soaring again. From $30 to $35.
Is this rally in NTRI stock legitimate? I think so. I easily see this stock heading another 20% higher to above $40 in a hurry.
Here’s a deeper look:
NTRI Is Back On Track
For all intents and purposes, it looks like NTRI management just got complacent after multiple years of red-hot growth. They weren’t fine-tuning the advertising campaign to be hyper-relevant, nor were they innovating enough in their product pipeline to keep consumers interested in an increasingly competitive marketplace.
That complacency caught up to them in 2018. Consequently, the company hit some road bumps in the early going in the 2018 diet season.
It looks like those road bumps are now largely in the rear-view mirror. The company’s advertising business has been revamped and is now back on track to being hyper-relevant to consumers, and the product pipeline is about as exciting as it’s ever been.
Granted, revenue growth and margins were still down in the quarter. But that is mostly just carry-over from a bad start to the year. The company’s key business metrics, such as length of stay, average selling price, and revenue per customer, all grew in the quarter. Reactivation revenues were also up double-digits. Better yet, all those metrics are improving on a month-to-month basis, with those improvements continuing into April.
Clearly, this narrative is inflecting upward so quickly that the changes are noticeable on a month-to-month basis. And why shouldn’t the improvement be that fast? After all, this is a company whose exposure to the secular growth space of healthy living and eating drove nearly 30% revenue growth last year. That trend of healthy living and eating hasn’t died down. If anything, it’s only picked up.
Thus, now that NTRI has put its company-specific headwinds behind it, growth should come back into the picture. Indeed, this is exactly what management is saying. Revenue growth is expected to be modest in the back-half of 2018, and then meaningful in 2019 and after. Meanwhile, operating margins are expected to start expanding again by the second half of the year.
NutriSystem Stock Could Rally To $40 & Up
Even after this massive rally to $35, there is still more room to run for NutriSystem stock.
Revenue growth was trending around 20-30% prior to the poor start to 2018. But revenue growth trends were slowing even before that. Thus, this company won’t return to 20%-plus revenue growth levels. But 10% revenue growth seems very achievable considering the secular growth tailwinds in healthy eating and living.
Thus, after this year, revenue growth should normalize around 10% per year. Assuming revenues come out at the midpoint of management guidance for this year ($700.5 million), then a 10% per year revenue growth rate thereafter would put revenues in 5 years at just under $1.03 billion.
Operating margins have soared from 3% a few years back to 12% last year. They are under pressure thus far this year due to challenged top-line results, but as top-line strength comes back in the back-half of the year, margin expansion is also expected to come back. Longer term, margins should continue to expand with healthy revenue growth. Overall, 15% operating margins in 5 years seems like a reasonable target.
That would imply operating profits of just under $154 million in 5 years. Taking out 23% for taxes and dividing by roughly 30.5 million shares, that equates to around $3.90 in earnings per share in 5 years.
A market-average 16-times forward earnings multiple on $3.90 implies a four-year forward price target of just over $62. Discounted back by 10% per year, that equates to a present value in the lower $40’s.
Bottom Line on NTRI Stock
NRTI’s rebound is legitimate. This stock was beaten up on unnecessarily short-sighted concerns that investors are now realizing were unnecessarily short-sighted.
Thus, the valuation on NutriSystem stock will continue to normalize over the next several months. Realistically, this normalization period should last until the stock price is above $40.
As of this writing, Luke Lango was long NTRI.