NutriSystem Beat Earnings, But It Lacks Conviction

NTRI stock - NutriSystem Beat Earnings, But It Lacks Conviction

Source: Nutrisystem

Sure bets in the financial markets are difficult to find, but they do exist. While no one can guarantee anything, some sectors, such as e-commerce or artificial intelligence, are very likely to do well over the longer-term. Cynically, an argument can be made to include NutriSystem (NASDAQ:NTRI) and NTRI stock in this exclusive category.

I’m not going to beat around the bush: Americans generally speaking have a weight problem. In 2009, the American Psychological Association revealed that as many as 50 million of us live sedentary lives. This worrying situation led some experts to call inactivity one of the biggest health risks of the 21st century.

More problematic is that the trend has seemingly worsened in recent years. According to, 80% of Americans fail to meet government benchmarks for aerobic activity and muscle strengthening. In addition, 45% of adults here are not sufficiently active to generate personal health benefits.

On the consumption front, the government recently warned that workers eat too much of so-called freebies. Typically, this comes in the form of cupcakes and other high-sugar treats for modest achievements in the office. Or, if middle management feels particularly generous, a pizza day could be in order.

Very few people turn down freebies, nor should anyone feel obligated to do so. But invariably, these culinary tokens are cheap, comfort food. They do little but contribute to the overall weight problem.

Naturally, NutriSystem should benefit, and it has. Last year, NTRI stock gained a massive 51% in the markets. Fundamentally, analyst believed the huge swing was justified. In 2017, the weight-loss specialists rang up $697 million in sales, up nearly 28% from 2016 results.

This year has been volatile, however, with NTRI stock shedding over 26% despite strong momentum since early May.

NTRI Stock Weak Despite Earnings Win

If observers were looking at NutriSystem’s second-quarter 2018 earnings results to shed light on NTRI stock, they would be disappointed. Although the company beat on both earnings and revenue expectations, shares closed down 2% on Monday. During after-hours trading, NTRI continued its volatile behavior, dropping 1.6%.

What gives? On paper, NutriSystem scored a robust win. Heading into Q2, consensus estimates pegged earnings per share at 81 cents. Actuals came in at 87 cents, producing a 7.4% positive surprise. However, in the year-ago quarter, EPS for NTRI stock was 80 cents, or a 9% increase.

Compared to prior year-over-year lifts, this quarter’s results underwhelm severely. In Q2 2017, the aforementioned 80-cent EPS represented a 48% YOY gain. In Q2 2016, the 54-cent EPS represented a nearly 32% lift against Q2 2015 results.

We see the same trend with revenues. The consensus called for $188.4 million. The actual haul was $191.3 million, or a 1.5% surprise. Absent of any context, you’d think these are great numbers. However, in Q2 2017, NutriSystem delivered $194.9 million on the top line. A simple arithmetic exercise reveals that the company is going backward, with a 1.8% YOY decline.

Analysts observed similarly disappointing results in Q1 earlier this year. At that time, the company reported $210.9 million, which was roughly 1% below the $212.7 million haul in Q1 2017.

The markets have largely anticipated these lackluster results. NTRI stock peaked around this time last year. This was during Q2 2017, when NutriSystem produced an outstanding earnings beat. Since then, however, the positive surprises have been comparatively modest.

Seeing the writing on the wall, astute traders dumped out of NTRI stock before it could damage their portfolios.

Is NTRI Stock a Contrarian Play?

On the surface, NutriSystem offers, in my opinion, a textbook contrarian play: many folks hate it, but the company has a strong foundation. Primarily, NTRI features a balance sheet that’s clean as a whistle. Not only does it have zero debt, but its cash position has increased significantly over the years. That gives management leverage that other organizations simply don’t have.

The risk, though, is ancillary competition. On the one hand, NutriSystem doesn’t really have a proprietary product. What I mean is, no one has a patent on healthy eating and activities. On the other hand, companies like Fitbit (NYSE:FIT), Garmin (NASDAQ:GRMN) and Apple (NASDAQ:AAPL) offer proprietary (and exciting) smart devices that facilitate and encourage healthy living.

And unlike NutriSystem, these device-makers don’t rely heavily on a subscription-based business. From the consumer’s perspective, you buy the product once and you can enjoy the benefits indefinitely.

Bottom Line on NTRI Stock Earnings

That said, Americans obviously need help losing extra pounds. I like NTRI stock as a contrarian gamble, but not at this price point. Due to technical weakness, I anticipate a return to $30, or maybe less. That is where NutriSystem becomes intriguing again.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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