A Dose of Growth for your Portfolio

By Chad Henage - May 29, 2012 | Tickers: GNC, VSI | 0 Comments

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When it comes to vitamins and supplements, there are two companies that stand out in my mind, GNC (NYSE: GNC) and Vitamin Shoppe (NYSE: VSI). Each company runs its own stores, and Vitamin Shoppe products can be found in major retailers. With the rising cost of health insurance, many individuals are looking for a way to stay healthy. Some companies are even requiring employees to submit to periodic health exams, or pay more for their health insurance premiums. With a constant push towards health and nutrition, both companies stand to benefit. They each look attractive at this time, but we'll use a scorecard approach to see which one might be a better buy today.

Both companies are expected to show pretty heady growth at over 20%. However, GNC has both the lower forward P/E ratio, and as we'll see in a minute, they have the potential to beat earnings estimates by a larger margin. For these two reasons, GNC wins the first round. (GNC – 2, Vitamin Shoppe – 1)

Companies that routinely beat analyst estimates usually are valued more highly in the market. If a company misses estimates, the stock can take a beating. Shareholders of both GNC and Vitamin Shoppe should be happy with the last four quarters results: 

As you can see, both companies have done well by trouncing earnings estimates on a regular basis. That being said, GNC beating estimates by over 20% is an impressive feat. The highest percentage of earnings beat wins, that factor alone gives this category to GNC. (GNC – 2, Vitamin Shoppe – 1)

Dividends are so popular in the market, that some have even asked if there is a dividend bubble. This category is short and sweet, GNC has a yield (1.12%), Vitamin Shoppe does not. The fact that GNC's payout uses only 35.81% of free cash flow based on last year's numbers, is an additional bonus. (GNC – 2, Vitamin Shoppe – 1)

I always compare companies free cash flow to try and get a sense of which one is the more efficient operator. The best way I've found is, using a number that I call the free cash flow per $1 of assets ratio. This looks at each company's free cash flow in the last year, and compares this amount to the company's total assets as of the most recent balance sheet. This is a situation where Vitamin Shoppe's bigger distribution network makes a difference. The company produced $0.106 of free cash flow for each $1 of assets last year. By comparison, GNC only generated $0.054 in free cash flow from the same $1 of assets. Better free cash flow per $1 of assets tells us that Vitamin Shoppe is the more efficient operator. In theory, this allows the company more flexibility to buy back shares, pay a dividend, or make earnings positive acquisitions. (GNC – 1, Vitamin Shoppe – 2)

Last but not least, we'll look at each company's balance sheet. This one is not even close. It really comes down to the fact that Vitamin Shoppe reports no long-term debt and GNC's debt-to-equity ratio is 0.92. No debt in my opinion is always better. (GNC – 1, Vitamin Shoppe – 2)

The totals are GNC – 8 and Vitamin Shoppe – 7. As I said at the beginning, both companies are attractive, but it seems GNC offers the slightly better mix of traits. I would tend to agree with the totals. GNC offers a dividend, which gives current income to shareholders, something that Vitamin Shoppe does not do. In addition, with a lower P/E ratio and a higher percentage of earnings beats, it seems like GNC is undervalued. Investors looking for a healthy dose of growth, would do well to add some GNC to their portfolio.

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