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Billionaire Steven Cohen Vitamins Up with GNC

March 04, 2013 | About:
Steve Cohen and SAC Capital are getting nutritious, in the sense that the billionaire-dollar hedge fund has upped its stake by over thirty times what it owned at the end of the fourth quarter in the vitamin and supplement retailer GNC Holdings (GNC). SAC Capital now owns 5.195 million shares, or 5.2% of GNC's outstanding shares. But, should investors follow Cohen's lead?

The stock is up 150% since its early 2011 IPO and now trades near its all-time high of $42 per share, but I still believe there could be room for it to go higher.

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Why should we care about what SAC Capital is doing? Over the last 20 or more years, Cohen’s SAC Capital has averaged returns of 30 percent. Cohen founded SAC Capital in 1992, and utilizes fundamental and quantitative analysis. SAC has around $14 billion in assets under management, with Cohen’s estimated net worth being upwards of $8 billion.

Fellow nutrition retail store and major competitor, Vitamin Shoppe (VSII), has also seen stellar growth in its share price, a steady up-and-to-the-right trend. Vitamin is up over 250% since its late-2009 IPO.

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Vitamin Shoppe is expected to move even higher, with JPMorgan recently upping its price target to $73, compared to the $64.50 it currently trades at. Before that, investment firm Piper Jaffray upped its target price to $68.

GNC, and the industry, have been treated nicely thanks to a consumer shift toward a more health-conscious lifestyle. Part of the previous headwinds for the vitamin industry was poor employment and tight consumer spending. However, rising employment should help boost consumer spending, where Standard and Poor's expects spending to be up 2.7% in 2013, after the projected 1.9% in 2012.

The vitamin market is rather niche, but a sizable market nonetheless, estimated to be a $29 billion industry, with GNC owning about 8% of the market, and Vitamin Shoppe owning 3.2%. Other competitors include the likes of Herbalife (HLF), which has been in the news of late as billionaires Bill Ackman and Carl Icahn are publicly battling each other, where Ackman is short the stock and Icahn is on the long side.

Herbalife's recent quarterly results were positive for investors on the long side. Earnings beat estimates, with EPS of $1.05, where the consensus was $1.03. Despite this, I still remain cautious about the business with respect to distribution networks and sales mix.

As far as how Herbalife stacks up to GNC, Herbalife does not have any retail outlets or stores, but only has a number of "nutrition clubs." These places allow people to join the "club" for a membership fee, where they can then get together, hang out and drink free shakes.

Boding well for GNC includes the fact that the company has expanded beyond its own distribution methods, making strategic partnerships with Wal-Mart to sell some of its products within the retail giant's stores. Whereas Vitamin Shoppe has over 500 retail stores, GNC now has over 6,000.

As far as recent activities, earnings from earlier this month do bode well for GNC. The vitamin retailer posted EPS of $0.50 for the fourth quarter, up from $0.35 for the same quarter last year and beating consensus estimates of $0.46. At the same time, guidance was also upped, where GNC now expects to see fiscal 2013 revenues up 10% and earnings between $2.75 and $2.80 per share. Analysts were previously only expecting EPS of $2.72 for 2013. The company also upped its it dividend by 36% and now pays a dividend yield of 1.4%.

Let’s stack up the two major vitamin retailers even more. The growth metrics for the two, GNC and Vitamin Shoppe, are impressive, with robust five-year growth rates across the board.

GNC

  • 5-Yr. Historical Revenue Growth 7%
  • 5-Yr. Historical Earnings Growth 28%
  • 5-Yr. Historical Cash Flow Growth 20%
Vitamin Shoppe

  • 5-Yr. Historical Revenue Growth 10%
  • 5-Yr. Historical Earnings Growth 42%
  • 5-Yr. Historical Cash Flow Growth 25%
Taking growth a step further, let's take a look at the expected EPS growth for the two:

5-Year Expected Earnings Growth

  • GNC 18.5%
  • Vitamin Shoppe 17.5%
Don't be fooled. Both GNC and Vitamin Shoppe have solid future expected growth, but which stock is the better buy? GNC is the better "growth at a reasonable price" opportunity:

PEG

  • GNC 0.8
  • Vitamin Shoppe 1.7
So why invest in GNC? Besides its leading market share and presence, the company is a great growth story and it’s cheap. GNC is trading at 1.2 times the S&P 500’s P/E, whereas its five-year average is around 1.35 times. Assuming GNC’s shares will come more in line with its historical average, thanks in part to a rise in consumer spending and employment, its P/E ratio should be 20.25x, meaning the potential upside for the stock could be around 33%

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About the author:

mdhargrave
Investment adviser and startup striver.

Visit mdhargrave's Website


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