NBTY Warrants Strong Buy Rating, Says Piper Jaffray

MINNEAPOLIS—In a tumultuous stock market that has prompted some natural products stock analysts to issue more downgrades than upgrades, supplements maker and retailer NBTY (NBTY) has garnered a Strong Buy rating from Minneapolis-based Piper Jaffray.

“We believe that NBTY is one of the few players in the $14.8 billion vitamin and supplements industry that has the infrastructure, brands and distribution channels to grow revenue and earnings faster than the industry growth rate,” says Piper Jaffray’s September 1998 report on the company, authored by analysts Allan Hickok and Yudi Bahl.

Long Island, NY-based NBTY has several qualities Wall Street likes. For example, it’s vertically integrated and diversified, manufacturing more than 1,000 SKUs of vitamins and nutritional supplements

It was founded as Nature’s Bounty Inc. in 1971 to sell supplements to drugstores, and in 1974 and 1979, respectively, the company launched a mail-order catalog and opened a retail outlet.

In 1989, NBTY acquired General Nutrition Co.’s (GNCI) mail-order operation and in 1997 bought the 420-store,

U. K.-based chain Holland and Barrett.

When NBTY’s EPS dropped $.02/share at the end of 1995, to $.15/share from $.17/share, the company decided to try generating a greater portion of its revenues through so-called direct-to-consumer channels, namely NBTY’s mail order and retail divisions. The move was a success. NBTY has since reported high double-digit revenue growth and a gross margin improvement of 470 basis points to 49.9% when comparing 1997 to 1995.

NBTY’s Puritan’s Pride nutritional supplements catalog now owns between 25% and 30% of the vitamin, mineral and herbal supplements mail-order market, the Piper Jaffray report says and estimates NBTY’s revenue growth at between 15% and 20%, with gross margins of between 55% and 57%.

NBTY’s retail division, however, is the company’s fastest-growing operation, currently producing top-line growth in excess of 50% and gross margins of between 57% and 59%. At last count, NBTY has about 179 Vitamin World retail outlets in 40 states. NBTY intends to operate in excess of 300 U.S. stores by September 1999.

The report says NBTY is better insulated than most of its competitors from the price discounts on certain commodity-type items that GNCI recently announced. It cites two reasons: NBTY already has everyday low pricing, and there is limited customer and market overlap between the two companies. More than 60% of NBTY sales are from non-GNCI markets.

“If GNCI were to discount its entire product line, then there would be a greater impact to NBTY; however, this seems unlikely since it would erode GNCI’s brand equity,” the report says.

Piper Jaffray has set a 12-month price target of $21/share on the stock.