Sometimes its good to follow Warren Buffett (Trades, Portfolio)’s advice and “Be greedy when others are fearful.” In the case of GNC Holdings Inc. (GNC, Financial), I am not so sure. With earnings set to be released later this month, GNC has already had a horrific year with its stock down 23% since the beginning of 2017.
The company’s roots date back to 1935 when David Shakarian open a health food store in downtown Pittsburgh. As legend has it, he only sold $35 worth of products that first day. Fast forward 80 years and the company generates north of $7 million a day. That is what intrigues me the most. The numbers look pretty solid.
Financial highlights
- Market cap: $609 million
- Revenue: $2.55 billion
- Gross margins: 35.9%
- Return on equity: 38%
- Net income: $190 million
- Capital expenditure: $51 million
- Debt: $1.4 billion
- Dividend yield: 9.5%
In the last decade, the company has earned over $1.5 billion net. That is two and half times its current market cap and, in this case, debt on the books should not be a detriment to continued growth. Half of its products are proprietary and GNC competes in a growing market that will continue to benefit from the demographic trends of an aging boomer population. Being a low-cost producer is still a competitive advantage. Despite lower EPS targets for this year ($2 range), the stock looks cheap.
The company has addressed its turnaround efforts, which include a new loyalty program with no membership fee, congruent pricing across sales channels and an expensive advertisement at this year's Super Bowl. Did not see it? It was banned.
From a business perspective, I do not see this as a turnaround story unless it shows a loss when it reports earnings in 16 days. I will be shocked if that happens. That said, the company’s stock is free-falling. Management has to be aware of the fact that over the last three years, since returning to the public markets, shares have declined 48%.
Two questions:
1. Is the company as or more valuable today than it was in 2011?
2. Will the company continue to produce solid financial output?
For investors skeptical on GNC’s dividend sustainability, with a payout ratio of 29% and fairly low interest expense on its debt, there is no reason to doubt the company will be able to continue paying its divided as long as earnings do not fall off a cliff. In the next two years, it is expected to earn approximately $4.80 a share. That is 50% of its current price.
Big money managers like Steven Cohen (Trades, Portfolio), Jim Simons (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) have small positions in the stock, tiny blips in their assets under management. This price point is too good to be true and investors have a right to be fearful when others are. In the next five years however, GNC stock could double.
Disclosure: I do not have a position in GNC, but may initiate a buy order in the next 72 hours.
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