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By Chad Henage - February 2, 2012 | Tickers: MED, NTRI, WTW | Comments

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.

It's the beginning of the year, how many people have kept their resolutions? The better question if you're an investor is what is the No. 1 resolution people usually make? The answer is to lose weight. Since there is an investment angle for pretty much any issue let's see how three of the weight loss industry's companies are doing. The three I have in mind are Medifast (NYSE: MED), Weight Watchers (NYSE: WTW), and Nutrisystem (NASDAQ: NTRI). 

Name

Price

P/E on '12 earnings

Growth expected

PEG

Yield

Medifast

$15.96

9.98

17.50%

0.57

0.00%

Weight Watchers

$71.16

15.61

14.03%

1.11

0.98%

Nutrisystem

$11.32

11.55

13.00%

0.89

6.18% 

The market sure differs in how to value these companies. Many times companies that sell for less than their growth rate are having issues. Another possible reason for a discounted price is the market doesn't believe analyst expectations. In addition, whenever I see a large dividend in comparison to the company's peers, I have to wonder if it's sustainable. Let's dig in a little further and see what we find out.

Cash flow can be a useful metric to compare companies. I like to look at the companies' cash flow after they have paid capital expenditures and dividends (if any). If a company is cash flow positive after these two costs that's usually a good sign. In the last year these companies show the following average quarterly cash flow:

Medifast = $5.2 million positive cash flow

Weight Watchers = $88 million positive cash flow

Nutrisystem = $9.1 million positive cash flow

It's difficult to tell which company is more impressive. Let's compare their cash flow to total assets. After all, if a company can generate more cash flow with less assets, the company would be more desirable. Comparing the three companies, we find the quarterly cash flow is the following percentage of total assets:

5% of the total assets of Medifast

8.09% of the total assets of Weight Watchers

6.06% of the total assets of Nutrisystem

In short, Weight Watchers generates more cash flow per dollar of asset on average than the other two.

We should also look at the balance sheet of each company. To make this as simple as possible we'll compare net cash position. A company with a positive net cash position has flexibility and should be a safer investment. In this case we find:

Medifast = Positive $33 million net cash

Weight Watchers = Negative $1 billion net cash

Nutrisystem = Positive $42 million net cash

This is interesting because while Weight Watchers clearly has the superior cash flow, it's needed to service the debt load that the company carries.

Last but not least let's look at the PEG+Y for each company. This ratio adds the company's growth plus dividends and divides by the P/E. This allows you to compare companies that pay dividends to those who don't.

The PEG+Y for Medifast is 1.75, Weight Watchers is 0.96, and Nutrisystem's ratio is 1.66. If Medifast's growth rate is correct, its higher PEG+Y indicates it might be the best value. Nutrisystem shareholders don't have to rely on as high of a growth rate. Since Nutrisystem has positive net cash flow, and a positive net cash position, the dividend should be safe. Weight Watchers shareholders fall somewhere in the middle. Weight Watchers doesn't pay the dividend that Nutrisystem does, and isn't expected to grow as fast as Medifast.

There are pros and cons for each company so use this research as your starting point and see which company might help you beef up your portfolio by helping others slim down.

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Chad Henage

Chad Henage is a member of The Motley Fool Blog Network.

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