Rexall Sundown’s 4Q99 Income Drop Just a Blip, Analysts Say

BOCA RATON, FL—Rexall Sundown’s (RXSD) net income took a header in 4Q99, but at least two analysts say it’s only a blip.

“They’re still the number-one selling supplement in the food/drug and mass channel, and they continue to gain market share,” says Yudi Bahl, an analyst at the Minneapolis-based investment-banking firm U.S. Bancorp Piper Jaffray.

Nevertheless, Bahl has given RXSD stock a neutral rating, with a target price of $15/share. “We think they’re very well positioned for the long run. From a long-term perspective, we believe they will retain their leadership position,” he says.

Banc of America/Montgomery Securities downgraded RXSD stock from Strong Buy to Buy, with a $16/share price target.

But Boston-based Adams, Harkness & Hill maintains its Strong Buy rating on the stock.

Rexall stock has traded as high as $22.88/share in the past year but closed the trading day Sept. 30 at $14.37/share, down more than $.31/share. At press time, the stock was trading in the $10.75/share range.

Overall, Rexall had a decent quarter, AH&H Managing Director Matt Patsky asserts. The supplements maker reported 4Q99 net income of $13.6 million, a decrease of 34% compared to $20.6 million in 4Q98. Net sales, at $159 million, were record-breaking, according to the company, but only a 3.6% increase over the $153.6 million reported in 4Q98. EPS, at $.21/share, were in line with First Call projections but below 4Q98 EPS of $.28/share.

“The reaction [by the stock market] had nothing to do with the quarter. It was that estimates for top-line growth next year moved down; that’s why the market spooked,” Patsky says. He adds that strong company fundamentals simply aren’t well reflected in the current market.

Bahl says RXSD’s plummeting net income didn’t surprise him. “Everybody in the industry has been hurting,” he says.

Rexall also has spent more than $18 million on advertising in 1999, double what it spent in 1998.

Bahl says RXSD has a high level of inventory, especially of its anti-cellulite supplement Cellasene, while other supplements companies have smoothed out their backlog. Indeed, RXSD’s inventory grew from $77.7 million in FY98 to $114.9 million in FY99, according to its 4Q99 report.

Patsky estimates that it will take a couple of quarters to determine how effective Rexall is at bringing that inventory down.

Nevertheless, RXSD President and CEO Damon DeSantis says the extra inventory will have “no effect on future revenues.”