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| | Company Focus
2 health retailers that insiders love
NBTY and Wild Oats shares have been hammered this summer, but insiders are buying at both companies. Heres why their recent ills may be good buying opportunities.
By Michael Brush
After years of counting carbs on the Atkins or South Beach diets, have Americans finally abandoned their health kick? You might think so, by the looks of the stock charts of a few of our countrys premier nutritional supplement and health-food companies.
Take NBTY (NTY, news, msgs), the largest vitamin and supplement company in the United States, for example. Starting in the middle of June, the stock cratered 46% to $20 from $37, gapping down twice and recovering only recently by a few dollars per share.
Or how about Wild Oats Markets (OATS, news, msgs), a chain of natural-food stores in the United States and Canada? This summer, it also sunk 46% to hit $7.43 in early August, from around $14 in mid-July. The stock has since rebounded by more than $1, but it still looks like a head of limp lettuce compared with levels earlier this year.
Both companies were the victims of surprisingly sluggish sales and profit growth that unnerved investors -- many of whom fear the slump may never turn around. Both companies also rank poorly in MSN Moneys StockScouter.
Take a closer look, though, and neither may be as sick as it seems. In fact, they may be good buys at recent prices, if high-level insiders know anything about how the story will end. Sure, StockScouter has picked up on negatives such as earnings shortfalls in the most recent quarter and relative weakness of the stock prices. But an effective if simple screen like StockScouter can easily overlook how underlying fundamental problems may only be cyclical and short term. It can also miss that things are about to improve because management is tinkering with the company.
Bulk buying at NBTY and Wild Oats
Management teams at both companies surely believe better days lie ahead. As the stocks cratered, insiders stepped up and bought hefty helpings of shares. Their buying was strong enough to get a USDA Prime rating at Market Profile Theorems, which now gives each stock the highest possible ranking of 10 for insider activity, based on the cluster buying at each company.
In late July and early August, William Shanahan, the vice president for information services at NBTY, and Michael Ashner, a director, bought 12,500 and 15,000 shares in the $20 to $21.70 range. Together, they plunked down more than $566,000.
But heres what makes their purchases even juicier. According to Thomson Financial Services, which closely tracks insider buying and selling, Shanahan and Ashner each have about the best market timing an insider can have. Theyre ranked 84 and 96 on a scale of 100. On average, the shares they purchase go up anywhere from 133% to 157% in the six months after they buy. Thats no guarantee NBTY shares will do the same. But its a good sign.
At Wild Oats, finance chief Edward Dunlap stepped up and purchased 15,000 shares on Aug. 5 at $7.92. He spent $119,000. In the next couple days, operations chief Bruce Bowman purchased 12,800 shares for around $7.85, worth $100,000. And Steve Kaczynski, the vice president of merchandising, bought 10,000 shares at $7.85, worth $78,500. General counsel Freya Brier also made a small purchase of 200 shares.
Aside from Brier, none of these insiders ranks particularly high for their market-timing skills, according to Thomson. But the good news for anyone long this stock is that theyre all immersed in the day-to-day operations of the company. So they have a good sense of where the business is headed. These so-called line officers also tend to have less money to throw around than board members. Thats another reason their buying can be more telling than purchases by board members.
Aside from the market-timing prowess and the birds eye views of these insiders, why should you believe them, as opposed to all the investors who seem to want to dump these stocks at any cost? Companies never tell the press exactly why insiders are buying, but heres a closer look at some factors that may be on their minds.
NBTY: A cyclical setback
The biggest vendor of vitamins in the United States, NBTY sells its nutritional supplements through four channels. The first two: Its U.S. (Vitamin World) and European retail chains. Third, its got a mail-order division called Puritans Pride. And finally, it has a wholesale operation known as U.S. Nutrition.
Through the wholesale arm (at 43% of revenue, its the biggest), NBTY puts vitamins on the shelves at major retailers such as Wal-Mart Stores (WMT, news, msgs) and Target (TGT, news, msgs) who get their own store names stamped on the bottles. Otherwise, youll see NBTY vitamins under well-known brand names such as Natures Bounty, Sundown and MET-Rx.
Why did NBTYs stock crater in the past few months, and what might bring it back? Simply put, there was a slowdown in the sale of vitamins and supplements, and that cut into profit margins and growth. But these slowdowns come and go, as part of a natural ebb and flow of interest in nutritional supplements.
Changes in the whims of consumers are often linked to things like negative press on food supplements, a new product cycle or new studies that put the spotlight back on supplements. But these cycles are hard to predict. That said, NBTY insiders who recently snapped up shares most likely think it is only a matter of time before the cycle turns positive.
We are in a weak vitamin market, but we have seen it before, says NTBY president and finance chief Harvey Kamil. I have been with the company 22 years, and when these things happen there is a little blip, and then demand comes back with a vengeance.
The problem, as Kamil will tell you straight out, is that its hard to know exactly when demand will snap back. We would think that the lull is not going to remain too long, but we dont want to make a predication because we just dont know. However, we believe what we experienced in the last quarter is not really indicative of the ongoing business. The key thing, says Kamil, is that NTBY lost no shelf space and, thus, no market share.
Meanwhile, as baby boomers age, the number of people who buy supplements the most is going to keep on growing. Someone turns 50 every eight seconds, and that is our customer base, says Kamil, who says he pops 35 to 40 vitamins and supplements each day. So we think that over the long term, things will go great. The key is, we have the infrastructure and the technology that no one else has.
One things for sure, NBTY shares look reasonably cheap. At its recent price of $22.40 per share, the stock trades for 11 times forward earnings of $2.02 per share. Over the years, investors have done well by stepping up any time NBTY shares trade for 10 to 12 times forward estimates, observes analyst Carol Buyers of RBC Capital Markets. Thats the main reason she upgraded the stock to outperform in early August. It is mainly a valuation call, Buyers says. But its one worth paying attention to. According to Investars, which tracks the performance of analysts, Buyers is the best in the pack at calling the twists and turns of NBTY shares.
Wild Oats expects an end to its California problems
Besides a full line of vitamins and supplements that make up a fifth of its business, Wild Oats Markets sells fresh produce, meat, seafood, dairy products and bulk dry goods that are guaranteed to be free of artificial additives and preservatives. The natural-foods chain has more than a hundred stores in 24 states, with its strongest presence in Southern California, Colorado, Texas and Oregon.
The source of recent problems at the health-food chain? You can trace them back to the five-month strike by Southern California grocery store workers around the turn of the year. Wild Oats Markets uses non-union labor, so they stole customers during the strikes. But then conventional supermarkets such as Safeway (SWY, news, msgs) and Albertsons (ABS, news, msgs) launched nasty price wars to win back those lost customers. Wild Oats couldnt avoid the fray, which has damaged growth at the natural-food-store chain. We have retained a high percentage of their customers, even though the strike ended in February. We kept those customers through May, and they really turned the heat up in June, says Wild Oats finance chief Edward Dunlap. They lost a lot of customers, and they are using aggressive pricing trying to get those customers back.
But insiders who stepped up and bought Wild Oats shares in early August under $8 most likely believe the price wars cant go on forever. Dunlap, one of the insiders, says so outright. What the conventional grocery stores are doing is not sustainable, he says. This is so expensive for them, it is going to be short term. But price wars could continue for a few quarters, he says.
Earnings at Wild Oats got hit by another factor last quarter, but it probably wont last long, either. The company provides health insurance to its own employees. It saw unusually high claims in June, but that wont persist, says Dunlap.
An analysts concerns
CL King & Associates stock analyst Gary Giblen agrees the recent insider buying at Wild Oats looks intriguing (even if he likes the buying at NBTY better). But he has several concerns about the outlook for the natural-foods retailer. First, he is skeptical of the argument that sales in Southern California were off because of post-strike supermarket price wars. If so, why have sales held up for Whole Foods Market (WFMI, news, msgs) in the same region? Next, Giblen worries that many Wild Oats stores are older and unattractive, and they give up a lot of customers whenever Whole Foods opens up nearby in what he describes as an ongoing search and destroy mission.
Dunlap responds that his chains newer format -- the Wild Oats stores which are more like Whole Foods Market stores -- actually held up fairly well in Southern California during the price wars. The stores most hurt were their older Henrys Marketplace stores, which more closely resemble conventional supermarkets by going for the price-sensitive customers. Dunlap agrees Whole Foods can grab market share when it opens near older Wild Oats stores that are in poor locations. But it is not the same when they come in against new stores that are better located, says Dunlap.
Meanwhile, Wild Oats is taking a few steps to boost growth. First, it has ambitious plans to open 20 new stores next year and 40 more in 2006, an aggressive schedule for a chain with just over 100 stores.
Next, the company has just set up a centralized distribution center in Riverside, Calif. This makes it easier to pool purchasing power at many stores to command better prices. It also helps Wild Oats Markets better time its deliveries. Thats key for a natural-food chain trying to set itself apart on the basis of product quality. Dont underestimate the power of a centralized distribution center to boost earnings growth. Its worked wonders in the past several years across a wide array of companies, from Guitar Center (GTRC, news, msgs) to Wal-Mart.
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