September 9, 1998
SMARTMONEY ONLINE:
Vitamin Stocks Get No Boost
From McGwire
By JOSHUA ALBERTSON
Dow Jones Newswires
SmartMoney Interactive
NEW YORK (Dow Jones)--Mark McGwire can move
a baseball 500 feet, but can he move stocks?
Let's see. McDonald's (MCD), which has worked to
link its two-all-beef-patties to the slugger, was down
more than 2 points the day after McGwire's record
shattering blast. Anheuser-Busch (BUD), whose name
graces the stadium in which McGwire's Cardinals play,
was up less than a point. How about vitamin stocks?
After all, McGwire's a supplement guy.
Nope. They're all down.
In fact, despite all the hubbub earlier this season over
Big Mac's locker full of nutritional supplements, workout
enhancers and other assorted treats, the summer of the
home run has most definitely not been the summer of the
vitamin stock.
The nation's largest vitamin and nutritional supplement
retailer, General Nutrition (GNCI), has atrophied
terribly, dropping 68% since its March high of 41 1/4.
And it's not because the company has decided not to
stock its controversial, testosterone-producing substance
that McGwire says has helped him stave off injury and
work out harder. Everybody in the group is down.
Manufacturers Rexall Sundown (RXSD) and NBTY
(NBTY) are 49% and 50% off their 52-week highs.
And even Whole Foods Market (WFMI), a natural
products supermarket, is down 42% since touching 70
in the spring.
What's the story? Doesn't everybody want to be like
Mac? The Wall Street analysts we spoke with aren't
sure that what transpires on the diamond has much
impact on vitamin stock charts. Still, Bill Steele of
Buckingham Research acknowledges, "If [McGwire]
decided to be a spokesperson positive."
Adds Matthew Patsky of Adams, Harkness & Hill,
"Certainly the sports nutrition business should be strong
and should be helped by Mark McGwire." But at least
for now, the story in the vitamin and nutritional
supplement business isn't a home run hitter, it's an
increasingly uncertain pricing environment.
In reaction to the burgeoning demand for lower cost
vitamins and nutritional supplements, General Nutrition
announced last month that it would cut prices on some of
its products and open a group of discount stores.
That news masked the concomitant announcement of
estimate-matching quarterly results and sent the stock
plunging 22% on fears that the company's margins and
earnings would suffer.
Other stocks in the industry capitulated in sympathy and
there hasn't been much bounce-back to speak of since.
"GNC's announcement just rocked the group," Steele
says.
And Steele thinks the environment for vitamin
manufacturers might get worse before it gets better. "The
boom [in vitamin sales] is still very strong. I just worry
that there are so many people increasing capacity," he
says.
It is true that baby boomers and sports enthusiasts have
been clamoring for products to make their lives better.
As BT Alex. Brown's Barbara Miller explains, the
industry has excellent demographics and
"psychographics." The problem, according to Steele, is
that retailers and suppliers might just be gearing up for
more sales than will actually transpire, a scenario that
would set the stage for inventory gluts and pricing cuts.
"After the initial ramp up, you have to look at consumer
takeaway and that's not growing nearly as fast [as the
increase in manufacturing and retail capacity,]" says
Steele.
Still, others think Rexall's future is bright. The
manufacturer's products are already positioned on the
less-expensive end of the vitamin scale, and even the
bearish Steele commends the company's distribution
model and ability to recognize market trends. Eight of
nine analysts surveyed by Zacks Investment Research
rate the stock a Buy or Strong Buy, including Patsky,
who notes, "The fundamentals of that company are
phenomenally strong." Indeed, earnings are expected to
increase by an average of 32% during the next three to
five years.
And although she recently lowered her estimates for
fiscal 1999 (ending in January) and 2000, Miller thinks
that retailer General Nutrition is still very attractive on a
valuation basis. After all, the stock trades at a puny
multiple of 7.3 times her 2000 estimates. That's less than
half of the forward P/E at which the stock has traded
during the past four years.
Miller believes that the company's foray into the low end
of the market has created understandable uncertainty,
but she is confident that the vitamin market will continue
to grow and that General Nutrition wil l maintain its
leadership position on the retail end.
"As there's more clarity, there will be more firmness in
the stock," she says, noting that multiple expansion into
the low teens would drive the stock into the 20s. But
after a tumultuous summer, it seems clear that even if you
think McGwire will finish with 70, and Sosa will hit 65,
the vitamin market is no place to make bets on baseball.
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