Stocks to Fulfill Those New Year's Resolutions part 1

By David Bogoslaw

As 2008 becomes a bitter and fading memory, it's fair to assume U.S. consumers are doing what they usually do as they ring in a New Year: make yet another round of resolutions that range from losing weight to eating more healthfully, and to spending more quality time with their families. This year there's a catch. Most lifestyle changes call for discretionary spending, and with the recession expected to deepen and bring more job losses, people tend to forego changes until they feel more financially secure.

Losing weight is usually the top priority when it comes to making New Year's resolutions. Over the long term the weight loss industry has been benefiting from increasing obesity both in the U.S. and abroad. Weight Watchers (WTW) and NutriSystem (NTRI) are two of the leading diet programs—and each work, says Greg Badashkanian, an analyst at Citigroup Global Markets.

Over the last two quarters, attendance in both programs has slowed a little as fewer new users have joined because of the softening economy, says Badashkanian. Feeling besieged by worries about shrinking home values and investment portfolios—as well as the looming threat of unemployment—some people may seek refuge in comfort foods and make shedding pounds a lesser priority. "January is obviously the most important time for diet companies because you have all these New Year's resolutions that dieters make," he says. "With the tough economy and the negative headlines from news stories on their minds, will they decide to go on a diet or maybe forgo that?"
Dieting can save money

Weight loss programs are a low-cost discretionary purchase compared with much more expensive items like recreational vehicles, whose sales are down more than 50%, says Badashkanian. Since NutriSystem customers get all of their food needs filled for just $10 a day, he sees that program as more of a staple. But while $10 a day for food is a bargain, NutriSystem still shows up on credit cards as a $300-a-month charge. "So,in their minds, there could be some reluctance to make that purchase," Badashkanian says.

Weight Watchers charges $10 a week for a support service with information to help people diet. That translates to a lower monthly expense, but doesn't include food, he says.

Given the weak economic outlook for 2009, Karen Howland, an analyst who covers healthy lifestyle stocks for Barclays Capital, expects the companies she follows to increase sales by only 3.3% this year, vs. 8.6% growth in 2008. "Most of our stocks have strong free cash flow and limited financing needs and should not need to access the capital markets in 2009 or 2010," she said in a Dec. 18 research note.

The $163 million of debt that Weight Watchers has to repay in fiscal year 2009 represents roughly 90% of what Barclays estimates will be the company's free cash flow, which includes the annual dividend.
Staying Fit

Health and exercise clubs such as Life Time Fitness (LTM) and Town Sports (CLUB) also typically benefit from New Year's resolutions, but economic stress may hamper their growth this year, some analysts say, In her note, Howland at Barclays warned that earnings for the healthy lifestyle stocks she covers could fall 7.9% on average in 2009—much more than the 1.9% drop projected by Wall Street, and compared with no change in 2008 from the prior year. These companies tend to be highly sensitive to consumer confidence and spending, she said.

Even though Howland trimmed her fiscal 2009 earnings estimate for Life Time to $2.09 per share, from $2.20, she predicts it will still increase profits by 4.6% over fiscal year 2008 "as centers opened in the past three years become more mature (and subsequently more profitable)."

There's also the possibility that Leonard Green & Partners, which bought a 9.2% stake in Life Time between Oct. 3 and Nov. 24, could take the company private. This "is likely to give owners of the stock some reassurance and a reason to hang on, while potentially causing short sellers (31% of the float) to cover and take profits," Credit Suisse analyst Paul Lejuez said in a Nov. 24 research note.