Friday, December 11, 2009

Weight Loss Stocks

Even if you did not like the proposition suggested in the last post, “Pounds for Stimulus,” you have to admit the U.S. presents a large, growing market opportunity for weight loss programs and therapies. Face it, we are a country of over-fed, indulgent consumers. The consequences of too many calories hang off our hips and bellies. So does that make great investments out of stocks for weight loss companies?

We applied some fundamental criteria to the following companies - sales growth, profitability, cash generation, low leverage, and relative value.

Abbott Laboratories (ABT: NYSE) produced Sibutramine (brand name Meridia) for weight loss. Of course, Abbott is among the largest pharmaceutical companies in the world. This one product is a minor portion of Abbott’s financial picture. Abbott is commercially successful with a trailing net margin of 18.7%. The debt-to-equity ratio is 0.73, well below the industry average of 2.26. ABT shares are price at 12.9 times estimated earnings for 2009.

Metabolic disease is one of four focus areas for Arena Pharmaceuticals, Inc. (ARNA: Nasdaq). The lead drug candidate, Lorcaserin Hydrochloride, is intended for the treatment of obesity and is being evaluated in a Phase 3 clinical trial program. The company is still in clinical stage and has yet to report revenue so valuation is mostly a bet on Arena’s intellectual property. Arena has tapped both public equity and debt markets to fund its research and development programs, so investors must consider higher than average leverage and potential dilution.

eDiets.com, Inc. (DIET: Nasdaq) sells weight loss plans on its Internet platform and delivers meals based on those plans to customers. The company licenses its intellectual property for use in private label web sites weight loss or nutrition programs. eDiets has yet to break even as selling and marketing costs still exceed revenue. With over $14 million in debt and a shareholder deficit, we view eDiets as in a precarious financial position.

GlaxoSmithKline plc (GSK: NYSE) sells generic Orlistat under the brand name Alli. Orlistat is supposed to prevent absorption of fats, thereby reducing caloric intake. The company markets the “lose weight easy” pill through a television ad campaign, engaging country western singer Wynona Judd as a spokesperson. ADRs for GSK trade on the NYSE at 10.4 time estimated earnings. A dividend yield of 4.4% makes the stock even more attractive. GSK reports a profit margin near 18.5%and the debt-to-equity ratio is as a modest 1.85 - at least for the drug industry.

Hoffman-LaRoche (Roche Holding AG, RHHBY.PK) also sells Orlistat under the brand name Xenical. Hoffman-LaRoche is stronger in European markets. As a play on weight loss Hoffman-LaRoche is priced a bit higher - 12.4 times forward earnings - than its direct competitor, GSK, and offers a lower dividend yield 2.6%.

Nutritional supplements and weight management through food selection is at the core of program marketed by Herbalife Ltd. (HLF: NYSE). The company has not been as successful in building profit margins as the pharmaceutical giants, but leverage is low with a nominal debt-to-equity ratio of 0.92. The stock is trading at 11.4 times 2009 estimated earnings. A dividend yield is 1.9% is not exceptional, but encourages long-term ownership.

NutriSystem, Inc. (NTRI: Nasdaq) with its nutritional program of planned meals is one of the highest priced weight loss plays with a forward earnings multiple of 22.3 times. Weight control through meal portion control and planning has been successful for many. However, the recent economic decline has cut into NutriSystem’s sales despite the help of celebrity spokespersons. The stock is trading near its 52-week high, suggesting investors use some caution in building new positions. For shareholders already holding NTRI, a dividend yield of 2.4% is reason to stay.

Oreixigen Therapeutics, Inc. (OREX: Nasdaq) has two obesity treatments under development. Phase III clinical trials have been completed for Contrave and Empatic is a bit further behind in Phase II. Contrave and Empatic are supposed to aid in weight loss through appetite suppression and metabolism enhancement. Oreixigen has no revenue from other products, making it a highly speculative play on weight loss.

Weight Watchers International, Inc. (WTW: NYSE) is the cheapest of our weight loss stocks at 9.9 times forward earnings. The stock also offers a 2.5% dividend yield at the current price level. Weight Watchers has a lengthy operating history and has built sales to nearly a billion and a half per year. The economic downturn has softened the company’s top-line, but not to the extent suffered by NutriSystem as Weight Watchers does not rely on the sale of food. Its Internet subscription weight management products and support group platform may also have been better received in recessionary times.


Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

2 comments:

perknlife said...

hi Also some weight weighing machines companies like Avon ;-)... from India needs to be added in ones portfolio

stephanie said...

I have tried another way to lose
weight. I tried adipex and it is
really effective. i have lost lots
of weight. I ordered it online from
www.medsheaven.com I highly
recommend this, and this didn't
require a prescription! ST