STOCK WATCH


Their Weight Loss Could Be Your Portfolio's Gain

Anne Kates Smith

January is prime time for thinking about waistlines. Check out six stocks that help people slim down and shape up.



Office parties and family feasts behind you, many readers have no doubt decided to count calories for a while and put in some time at the gym. Kiplinger's applauds your efforts. But there are other ways to invest in a healthy lifestyle, ways that may not decrease your waistline one iota but may bulk up your portfolio instead. The start of the year, when everyone is focused on weight loss and fitness, is a great time to buy healthy lifestyle stocks. And sadly for too many plump Americans -- but fortunately for investors -- the long-term outlook for many of the stocks is fabulous.

Together, companies in the healthy lifestyle sector generate $100 billion in annual revenues and are growing two to three times faster than the economy overall. No wonder. The prevalence of overweight or obesity among U.S. adults has increased from 45% in 1990 to 60% in 2004, according to the Center for Disease Control and Prevention. The rate among adolescents has more than tripled in the past two decades. The World Health Organization reports that more than 15% of the world population is overweight -- that's more than 1 billion people.

But we're also growing older -- not just fatter. As baby boomers enter their senior years, many will have the time, resources and the disposition to maintain a higher standard of fitness than past generations, posits Lehman Brothers analyst Michael Lasser.

The government, too, has a vested interest in promoting healthier lifestyles as health care expenditures for an aging population increase dramatically. A reported 400 obesity-related bills were introduced in state legislatures in 2005. Proposed federal legislation includes a bill that would allow employers a tax deduction for dues paid to a fitness facility and would ensure that the benefit would not be taxable as income to the employee. Another bill would allow people to deduct up to $1,000 a year for exercise equipment or fitness programs.

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Success isn't a slam dunk for dieters, exercisers or investors (the sector, by the way, includes weight loss firms, vitamin and supplement manufacturers, natural and organic nutrition companies and health club and fitness providers). Weight loss drugs, a couple of which could be on the market within months, could pose a significant short-term risk to weight loss and fitness stocks, for instance. But ultimately, the pills will likely prove no magic bullet and produce their best results in conjunction with a moderate diet and exercise, rather than instead of them. So given that the medical, demographic and political trends bode so well for healthy-lifestyle stocks, here's our take on a half-dozen.

NutriSystem (NTRI, $63.77). NutriSystem sells prepackaged meals directly to consumers, via telephone or Web site for about $280 a month. Customers expect to shed a pound or two per week. Last year the company added 800,000 new customers, on top of 350,000 in 2005. Growth should continue at a rapid rate for the next two to three years, driven in part by a rush of orders from men, quarterbacked by pitchman and former NFL football star Dan Marino.

The company hopes to reach another largely untapped market when it rolls out a program for seniors in coming months, focusing on the health and convenience of the home-delivered meals, rather than on appearance. Wall Street analysts expect earnings to grow nearly 40% this year, and expect an annualized 30% growth rate on average over the next three to five years. Despite its hyper growth rate, the stock trades at just 21 times estimated 2007 earnings. Analysts who cover the stock are mostly bullish, expecting it to trade up to nearly $90 on average over the next 12 months.

Lifetime Fitness (LTM, $49.87). This chain of fitness clubs tries to offer "a Lexus experience at a Toyota price," quips Lehman's Lasser. Says analyst Kathryn Thompson at Avondale Partners, in Nashville, "It's the YMCA meets the country club." For about $60 a month patrons enjoy amenities usually reserved for facilities that charge twice that -- luxurious wood-paneled locker rooms with blow dryers all around, a full complement of yoga, Pilates and spinning, along with pools, a cafeacute; and enormous day-care centers with their own mini basketball courts.

Minnesota and Texas are primary markets, but the centers -- huge, Wal-Mart-sized facilities with an average of 10,000 members -- are opening up in Georgia, Phoenix, Salt Lake City and other, mostly suburban markets. Company executives expect 200-plus new centers in the U.S. over the next several years. Analysts expect earnings to grow at an average annualized pace of 25% over the next five years; the average price target for the stock over the next 12 months is $58.

Town Sports International (CLUB, $16.74). Avondale's Thompson calls this urban fitness chain's strategy the "Starbucks effect." It seeks to saturate a given market with an easy, convenient, reliable and recognizable product. True to form, on January 3, the company announced the opening of its 100th New York Sports Club. It currently operates 146 clubs with 447,000 members in the U.S. in New York, Boston, Washington, D.C., and Philadelphia (all with similar names -- Boston Sports Club, Washington Sports Club, and so forth.). A tweaking of membership programs in 2003 has curtailed attrition rates, and club revenues have grown consistently since the late '90s and seem unaffected by overall levels of consumer confidence -- recession or no, its members seem to continue to work out. Avondale thinks the company can eventually double the number of clubs in its current markets. Analyst Thompson gives management high marks for being "grounded and realistic, with deep industry experience." She sees earnings per share growing 44% this year, to 72 cents a share, versus an estimated 50 cents in 2006. The stock could reach $24 within the year.

Nautilus (NLS, $14.05). Chances are, when you work out at your club you'll use a Nautilus machine, or a StairMaster, Schwinn, TrimLine, TredClimber -- maybe even the company's signature Bowflex machine, marketed directly to late-night insomniacs who vow to stop watching TV and start working out. Nautilus is a turnaround story -- one that, judging from the interest in the stock from short-sellers (traders betting the shares will fall), not everyone believes.

The company suffered some supply-chain snafus in 2005, and a knock-off of the Bowflex, which accounts for 44% of sales, hit the company hard and led to expensive, ongoing patent litigation. A new CEO and the creation of two separate positions -- head of manufacturing and head of supply chain -- hold promise for a brighter outlook. Avondale's Thompson is among the most bullish Nautilus fans. She sees earnings per share growing at an annualized rate of 20% to 30% over the next three years and points to the company's debt-free balance sheet as justification for her stock price target of $23 over the next 12 months, based on the stock selling at 23 times estimated '07 earnings of $1.00 a share. Fourth-quarter '06 earnings, due early February, will give a good indication of whether Thompson's bullishness is justified.

Herbalife (HLF, $39.32). Herbalife, founded in 1980, is one of the world's largest multi-level marketing companies. A sales force of more than 1 million is spread across 62 countries, pushing a variety of weight management, nutritional supplements and personal-care products. Some 80% of sales come from outside the U.S. A new management team that came on board in 2003 combines strong leadership in marketing, product development, finance and management and has turned the company around, finding new areas of distribution and customers. The company will realize a huge growth opportunity if a pending license to sell in China is approved. Lasser, the Lehman analyst, sees earnings per share growing at 15% to 20% annualized over the next several years, and sees the stock trading at $45 within the next year or so. That would give the stock a price-earnings multiple of just 18, based on Lasser's estimated '07 earnings of $2.45 a share.

Weight Watchers (WTW, $52.97). Perhaps the best-known name in weight control is the one with the least-attractive stock at the moment. The mature company is trying to figure ways to adjust its pricing structure to extract additional revenue from its membership, which is divided fairly equally between new customers and folks who've been on the program up to five times previously. The main problem is that the company (and the stock) has produced inconsistent results, beating investors' expectations one quarter and disappointing the next. A new CEO may right things, but with tenure of just a few weeks, it's too early to tell. For now, an ongoing buyback is supporting the stock; when that expires, the company will have to show investors solid financials. A stock price around the mid-to-high $40s would represent a better value for the company -- whose long-term potential, like the rest of us, might well be super-sized.




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