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Nutraceutical International: 30% Discount to Historical Average P/E with Inaugural Special Cash

December 18, 2012 | About:
Nutraceutical International Corporation (NUTR) is an integrated manufacturer, marketer, distributor and retailer of branded nutritional supplements and other natural products sold primarily to and through domestic health and natural food stores. Internationally, NUTR markets and distributes branded nutritional supplements and other natural products to and through health and natural product distributors and retailers. Its core business strategy is to acquire, integrate and operate businesses in the natural products industry that manufacture, market and distribute branded nutritional supplements. It manufactures and sells nutritional supplements and other natural products; and also owns neighborhood natural food markets and health food stores. NUTR manufactures and/or distributes one of the broadest branded product lines in the industry with over 7,000 SKUs, including approximately 900 SKUs sold internationally, under approximately 50 different brands.

Valuation and Financial Analysis

NUTR is currently trading at a trailing twelve months P/E of 10.42 and a trailing twelve months EV/EBITDA of 5.54. Its current P/E valuation represents a 31% discount to its five year average P/E of 15.04. NUTR achieved a ROE of 12.6% for the past 12 months and a five-year average ROE of 8.1%. NUTR is free cash flow positive for every single year in the past decade and profitable in 8 out of the last 10 years. Historical gross margins, EBITDA margins and net margins have been consistent at 50%, 15% and 8%, respectively. Management has grown revenue and EPS by a five-year CAGR of 5.1% and 6.7%, respectively.

NUTR P/E-ROE Comparison 1355827999564.png

NUTR Earnings-Cash Flow Comparison 1355828059950.png



NUTR Profit Margins Analysis
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Financial and Business Risks

NUTR is moderately geared with a gross debt-to-equity ratio of 26% and a net gearing of 22%.

NUTR Cash-Debt-Market Capitalization Comparison1355828267631.png

The FDA Food Safety Modernization Act, enacted Jan. 4, 2011, amended the Federal Food, Drug and Cosmetic Act to enhance Food and Drug Administration's authority over various aspects of food regulation. One of the more relevant and significant changes is the requirement of hazard analysis and risk-based preventive controls for all food facilities, including dietary ingredient facilities. The requirements, if proposed by FDA, may increase the costs of dietary ingredients and affect NUTR's ability to obtain dietary ingredients.

The retail natural products and the vitamins, minerals and supplements markets are highly competitive with low barriers to entry. Besides large, nationally known competitors and smaller brands, manufacturers and distributors of nutritional supplements, NUTR's customers are increasingly selling part of their products under their own private labels at a discount to their branded counterparts.

Based on comments from some publicly traded nutritional supplement companies over the recent years, there is a widespread consensus that the growth rate of health and natural food stores is unlikely to return to the peaks achieved in the mid-1990s, given certain negative press releases regarding some ingredients and companies in the vitamins, minerals and supplements market and the lack of any blockbuster hits.

Business Quality and Capital Allocation

NUTR is well-positioned to capitalize on the $126 billion retail natural products market (source: Nutrition Business Journal), as one of the largest suppliers of nutritional supplements to health and natural food stores. NUTR is currently focused on the vitamins, minerals and supplements sub-segment worth approximately $30 billion and has recently increased its efforts in other areas within the retail natural products market such as personal care and organic foods. NUTR also believes that there will be a process of quality differentiation, with health and natural food stores increasingly aligning themselves with companies like NUTR which offers a wide variety of high-quality products and supports their brands with sophisticated marketing and promotional programs.

NUTR manufactures approximately 75% of its branded products in fiscal 2012 and believes that the quality of its products is among the best in the industry. Its quality control program seeks to ensure that its products are manufactured in accordance with current Good Manufacturing Practices and its processing methods monitored closely to ensure product purity and the use of quality ingredients. NUTR also maintains a tighter control over product quality, availability and reduces production costs, by manufacturing the bulk of its own products. The bulk of its manufacturing facilites are located in the greater Ogden, Utah, area. In addition, NUTR has close working relationship with many outside manufacturers, including certain softgel manufacturers and packagers.

NUTR introduced more than 200 new SKUs in fiscal 2012 and targets to be a market leader in the development of new and innovative products. It has entered into a cooperative arrangement with Weber State University in Ogden, Utah, where the university provides it with access to certain laboratory space and equipment. NUTR currently employs professionals in research and development and quality control with degrees in chemistry, microbiology and engineering, and provides additional training to these professionals in the area of natural health food products.

Prior to fiscal 2012, NUTR's Board of Directors approved a share purchase program authorizing it to buy up to 3.5 million shares of common stock. On April 23, 2012, an addition of 1 million shares to its existing share purchase program was approved. NUTR repurchased 417,136 and 335,771 shares in fiscal years 2012 and 2011, respectively. As of Sept. 30, 2012, 1,126,885 shares, equivalent to 11% of shares outstanding, have yet be purchased under the share repurchase program.

On Dec. 11, 2012, NUTR announced that its board of directors has declared a first-ever, special cash dividend of $1.00 per share payable on Dec. 28, 2012, to shareholders of record on the close of business on the record date of Dec. 21, 2012.

Conclusion

NUTR's current P/E valuation at 10.42 appears cheap, relative to its five-year average P/E of 15.04 and a trailing 12 months ROE of 12.6%. NUTR is profitable and free cash flow positive for every single year in the past decade. It has 1.1 million shares, or 11% of shares outstanding, remaining from its share repurchase authorization and declared a first-ever special cash dividend of $1.00 per share on Dec. 11, 2012.

NUTR, with its wide variety of high-quality products and strong brand support through sophisticated marketing and promotional programs, is likely to benefit from a process of quality differentiation where health and natural food stores align with stronger companies like NUTR.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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