Wouldn't it be nice if APPI's name were here instead!
he SmallCap Investor
Stock of the Month
December 1998
Natural Alternatives International, Inc.
Nasdaq National Market: NAII
NATURAL ALTERNATIVES COULD SUPPLEMENT SMALL-CAP PORTFOLIO
Ginko Biloba... St. John's Wort... Kava Kava root... Saw Palmetto...
Devil's Claw...
Even if you don't use any of these products, chances are you've at
least heard some of the names before. And most people are probably
familiar with the increasingly popular vitamin C and E supplements.
Natural and herbal remedies have gone mainstream in recent years and
business has boomed. Annual U.S. sales of nutritional supplements
total approximately $8 billion, and the industry now posts growth in
excess of 15% per year.
The March 1998 issue of The Journal of the American Medical Association
(JAMA) stated that more than 80% of medical students would like further
training in complementary and alternative medicine (CAM), recognizing
the increasing importance of CAM in modern health care. And according
to a November JAMA article, total visits to alternative medicine
practitioners between 1990 and 1997 jumped 47.3% to 629 million - a
greater number of total visits than to all US primary care physicians!
JAMA also reported a 380% increase in the use of herbal remedies and a
130% gain in high-dose vitamin use over the same period, noting that
nearly one in five users of prescription medications also took herbs,
high-dose vitamin supplements, or both. The JAMA article concluded that
its "survey confirms that alternative medicine use and expenditures
have increased dramatically from 1990 to 1997."
Many major pharmaceutical companies have entered the nutritional
supplement business, adding to consumer awareness and supporting the
industry's credibility. Herbal medicines even made the November 23,
1998 cover story of Time Magazine.
<http://cgi.pathfinder.com/time/magazine/1998/dom/981123/cover1.html>
Natural Alternatives International (Nasdaq: NAII) is a rapidly growing
company involved in many aspects of the nutritional supplement
industry. Natural Alternatives formulates, tests, manufactures and
markets customized nutritional supplements which are then distributed
by companies such as Jenny Craig, Bally Total Fitness, Avon, and
NordicTrack under their own brand names.
Much more than just a private label manufacturer, NAI also provides
client-support services such as clinical studies assessment,
customer-specific nutritional product formulation, product testing and
evaluation, marketing management and support, packaging and delivery
system design, and international product registration assistance.
Additionally, the company has several proprietary lines of specialty
products that typically generate higher profit margins, assist in
product diversification, and help NAI rely less on contract
manufacturing. NAI narrowly focuses its marketing activity on
attracting and retaining a select number of large, financially sound
companies with global, growth-oriented objectives.
NAI's sales are riding the fast track, growing from $14.5 million in
fiscal 1992 to $37.4 million in fiscal 1995 to $67.9 million for fiscal
1998 (ended June 30, 1998). Earnings per share have recorded impressive
gains, rising an average of 33% per year over the past six years and
reaching $1.00 in fiscal 1998. In the first quarter of fiscal 1999
(ended September 30, 1998), sales jumped 41% to nearly $17 million. Net
income skyrocketed 154% to $1.5 million, or $0.25 per share, from
$598,000, or $0.11 per share, in last year's first quarter. Estimated
earnings per share for the full fiscal year ending June 1999 now stands
at $1.25. At NAI's current price of $10.00, this translates into a P/E
ratio of just 8, low for a company with NAI's impressive growth.
Graph of Revenues and Net Income:
smallcapinvestor.com
The company is taking critical steps to further expand its business and
continue its rapid earnings growth: (1) Expanding its customer base and
decreasing reliance on a few large customers; (2) Expanding its
manufacturing capacity; and (3) Introducing new nutritional supplement
products.
One of the largest concerns about NAI is its customer concentration.
During the three months ended September 30, 1998 three companies
represented over two-thirds of NAI's sales. Fortunately, NAI
understands this risk and has recently been successful in adding major
new clients Herbalife, Pharmavite, and Alcon Pharmaceuticals. As a
result, in the September 30 quarter, NAI's top two customers
represented 49% of sales, down from 57% in the year ago quarter. And
this occurred even with sales to the top two customers increasing by
24%. NAI intends to continue working to reduce customer concentration
by adding new customers. The company is also working with existing
clients to help them expand internationally. International sales
currently comprise about 20% of NAI's sales, up from just 1% not long
ago.
NAI plans to move its headquarters to a new state-of-the-art, 82,000
square foot office and manufacturing facility by early 1999, doubling
current manufacturing capacity. NAI also may acquire a facility in
Switzerland to help boost its European presence and avoid the tariffs
involved in shipping product to Europe from the United States. In NAI's
existing location the company operates top-of-the-line, high-speed
manufacturing equipment for producing tablets and capsules. NAI's
tablet manufacturing operation can produce 1.5 million tablets per
hour, or 5.1 billion tablets per year. The advanced equipment also
increases efficiency and lowers costs. The company may realize
additional manufacturing efficiencies once it opens its new facility.
NAI also plans to keep growing by introducing proprietary new
nutritional supplements. The company is attempting to secure patents on
a major new product called "The Oxford Factor." NAI feels this is a
breakthrough product with a potentially significant impact on the
company.
NAI boasts solid financial strength, with over $5 million in cash, an
excellent current ratio (current assets divided by current liabilities)
of 3.25, and long-term debt of less than $1 million. The company plans
to spend about $10 million during the rest of the current fiscal year
on capital expenditures related to the new headquarters as well as the
new warehouse and blending facility. NAI plans to pay for these
expenditures with its available cash, cash generated from operations,
borrowings on its credit line, and long-term debt or equity financing.
With NAI's stock price near its 52-week low, it may be more likely that
debt rather than equity financing would be used.
Some observers may view insider selling by the CEO, the President/CFO
and the Chairperson of the Board as cause for concern. However, it's
not unreasonable for longtime executives to reduce their stock holdings
for legitimate personal reasons. Unlike insider buying, considered a
strong positive indicator of a company's fortunes, insider selling is
not necessarily negative.
With a high growth rate, a low P/E, and a solid balance sheet, Natural
Alternatives International deserves a serious look from microcap
investors. Applying a reasonable P/E ratio of 15 to the fiscal 1999 EPS
estimate of $1.25 yields a stock price of $18.75, our initial target
price for NAI shares.
--The SmallCap Investor
Company Name: Natural Alternatives International, Inc.
Nasdaq National Market: NAII
Stock price on date of report: $9.75 bid, $10.00 ask
52 Week Range: low $8.625, high $26.625
Diluted Shares outstanding: 6,179,108
Market cap: $61,018,691
Book value: $4.88
Current ratio: 3.25
Insider Ownership: 25.82%
Institutional Ownership: 46.16%
Website: nai-online.com
(This report was written by The SmallCap Investor and has not been paid
for or approved by Natural Alternatives International.)
For more information on Natural Alternatives International, please
contact Beverly Coyne, Investor Relations, at (760) 744-7340.
For a quote & graph, and links to additional information, please see:
quotecentral.com
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