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NutriSystem: Gaining Heft

This weight-loss company is poised to fatten up on overweight Americans' efforts to slim down, an analyst says.

Companies that help increasingly overweight Americans shed pounds have plenty of opportunity to bulk up on profits. Not surprisingly, competition in this growing industry is keen. But NutriSystem, a well-known brand in the battle of the bulge, is in a good position to win an increasing share of dieters' dollars, says Citigroup analyst Gregory Badishkanian.

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NutriSystem (symbol NTRI) is a turnaround story. New management, which came on the scene in 2002, has been reinvigorating once-languishing sales. The company has whipped itself back into fighting shape by developing new products and honing its marketing strategy, Badishkanian says. He estimates NutriSystem's sales will increase 86% in 2006, and he now sees the stock as the "best way to capitalize on America's growing obesity epidemic."

Unlike competitor Weight Watchers, NutriSystem focuses on selling food directly to customers, mainly through Internet orders. That's a smart strategy, Badishkanian says, for attracting the large number of dieters -- including busy women -- who prefer to have prepackaged meals delivered to their doors with no meetings or calorie-counting required. He adds that it's also a good way to attract male customers, whom he sees as an underserved group. NutriSystem markets meals specially designed for men.

Badishkanian says that another of the reasons NutriSystem's products are appealing to dieters is that they're priced lower than those of food-delivery rivals, such as Jenny Craig. Plus, he says, NutriSystem's diet plan appears to work. That's good for encouraging repeat business from customers who regain their weight after going off the plan.

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Badishkanian estimates sales will reach $400 million in 2006. That's a far cry from revenues of $1 billion a previous version of the company enjoyed at its peak in 1991. But Badishkanian says NutriSystem "could become a billion-dollar brand again by 2010" if it is able to continue to market its products effectively to new customers and build on its strong brand name. It's difficult to make accurate forecasts that far out, however.

Analysts' 2006 earnings estimates vary widely, from 88 cents per share to $1.50 per share. The stock trades at 39 times the average estimate of $1.22 per share.

The share price has picked up some weight of its own over the past year, zooming from $3 to $47. But Badishkanian says that, given the company's strong growth prospects and healthy balance sheet, it should continue to climb. He thinks it can reach $64 over the next 12 months.

The stock has big risks, though. Besides the threat of competition from rivals, potential new diet fads and drugs could hurt NutriSystem's business.

--Lisa Dixon

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