A Dividend Play With A Turn Around Twist

Recently, on "The George Jarkesy Show" I discussed the company Nutrisystem (NTRI) with Clay Mahaffey, the Chief Analyst of The National Eagles and Angels Association. Clay pointed out the current dividend is at 6.2 % as of March 14th and that management still has some fat to cut on their SG&A.

George Jarkesy: Clay Mahaffey, the Chief Analyst of the National Eagles and Angels is joining us now for Stock Watch.

Clay Mahaffey: George, today the company is NutriSystems, Inc. They trade on the NASDAQ symbol: NTRI, at about $11.20 today. This is a stock that I like on valuation. I think everybody knows this company. They're the number one home delivery weight loss company. They offer nutritionally balanced weight loss programs in addition to food. There's also counseling. They have specialized products for men, women, seniors, as well as people with Type II diabetes.

They've been in business for 40 years. The current spokesman is a well-known celebrity, Janet Jackson as well as Terry Bradshaw, who are the faces of the company on TV. The history here is that the stock was pretty sexy. Five years ago it hit a high of $70.00. With the recession, it fell down to $11.00 in 2009. The reason is that the growth story was being questioned, and they were facing serious competition from Weight Watchers and Jenny Craig. The stock has not done very much in the last year.

They have started a turn around. They've cut their overhead costs 25 percent in 2011. Just two weeks ago, they hired a senior marketing group guru from Nestle who was a manager of a $2 million business at Nestle. I like the stock. It's has a very strong balance sheet. They've got $2.00 a share in cash. They have very little debt.

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An interesting play here is the dividend. They're paying about $0.70 a year, so it's yielding about 6.2 percent today. They're only paying out about 40 percent of their cash flow, which is the thrust of this business. It's reasonably profitable. I think the catalyst at this point is continued cost cutting.

The reason I say that, George, is the company is a little top-heavy. Their SG&A expense, their sales, general, and admin costs are 42 percent of their sales. Their competition, Weight Watchers, is only 27 percent. So I think they have a long way to go on cost cutting. I hope that management is committed to that task. The new hire has been brought in to address the decline in sales and to grow the top line. I think the consequence of that is that the stock could get up to around $17.00 based on maintaining the current dividend and it returning to a 4 percent yield that it was a couple of years ago.

George Jarkesy: What's it trading at today, Clay?

Clay Mahaffey: $11.21.

George Jarkesy: So a lot of upside?

Clay Mahaffey: It's about 50 percent upside. I would say only about a 10 percent downside. It's trading near the low the last couple of years. They're not going out of business. It's a well-established product. It's a very large market. They've run into some bumps and I think it's in the hands of management to take the necessary steps to reduce costs and increase the top line. As investors see that story, I think they'll start buying the stock.

Clay Mahaffey: 90 percent of the shares are owned by institutions and hedge funds. I cannot imagine they're not calling management with the exact same story I laid out.

George Jarkesy: That's why management's paying out 40 percent of their cash flow in dividends is because they'll get squeezed if they don't. For our listeners, you know you have a real analyst, a real hardcore Wall Street analyst when he starts referring to stocks as SEXY. Clay, thanks a lot.

Clay Mahaffey: $70.00 is sexy stock.

Disclosure: Nutrisystem is subsequently in the Micro Dynamic Portfolio which is part of the National Eagles and Angels newsletter. Neither, Clay Mahaffey or George Jarkesy owns this stock.

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