Tivity Health Inc Down 60% But Key Takeover Could Power Rally

Tivity Health Inc’s Game-changing Acquisition Is Underappreciated

Stocks with major short positions could return huge gains if the short sellers are wrong. But if they are correct in their assessment, a heavily shorted stock could sell off.

That’s the risk, but I don’t think that’s the case with Tivity Health Inc (NASDAQ:TVTY), where shorts represent about 33% of the float (at the time of this writing). This makes for an aggressive opportunity for traders.

Tivity is a play on the wellness segment, providing fitness and health improvement programs.

The bears are clearly in control; TVTY stock is down about 60% from its record $48.50 in November 2017.

While the shorts are currently winning the battle, my view is that Tivity Health stock could be primed for a technically oversold rally.

Tivity Health has been growing its revenues while delivering profits and positive free cash flow.

But what makes the company intriguing is its $1.3-billion purchase of Nutrisystem, Inc. in December 2018.

My view is that Tivity Health, for whatever reason, is misunderstood by the market. If I’m right, TVTY stock could inevitably surge.

The price chart shows Tivity Health stock breaking out of its sideways channel resistance in early November and looking to hold above channel resistance.

Chart courtesy of StockCharts.com

The surfacing of a golden cross pattern adds some optimism. If TVTY can hold, I would expect the short sellers to cover and provide some buying support.

Why Nutrisystem Could Be the Key for TVTY Stock

The revenue picture will be powered by the addition of Nutrisystem. Even before the acquisition, Tivity Health grew its revenues from 2016 to 2018.

Fiscal Year Revenues (Millions) Growth
2014 $742.2
2015 $452.1 -39.1%
2016 $501.0 10.8%
2017 $556.9 11.2%
2018 $606.3 8.9%

(Source: “Tivity Health, Inc.,” MarketWatch, last accessed December 30, 2019.)

The addition of Nutrisystem is expected to drive combined revenues to an estimated $1.1 billion for 2019 and $1.3 billion in 2020. (Source: “Tivity Health, Inc. (TVTY),”Yahoo! Finance, last accessed December 19, 2019.)

Tivity reported positive earnings before interest, taxes, depreciation, and amortization (EBITDA) in five straight years, with growth over the last four years.

Fiscal Year EBITDA (Millions) Growth
2014 $78.5
2015 $98.5 25.4%
2016 $104.4 6.0%
2017 $127.0 21.6%
2018 $138.5 9.1%

(Source: MarketWatch, op. cit.)

The company was profitable on a generally accepted accounting principles (GAAP) earning-per-share (EPS) basis from 2016 to 2018.

Fiscal Year GAAP Diluted EPS Growth
2014 -$0.16
2015 -$0.92 -472.4%
2016 $2.04 323.1%
2017 $1.39 -32.2%
2018 $2.26 63.3%

(Source: MarketWatch, op. cit.)

Adjusting for one-time items, Tivity Health reported $2.34 per diluted share in 2018, but this is expected to contract to $2.17 per diluted share for 2019 as the company works on its merger.

For 2020, TVTY is estimated to ramp up its earnings to $2.15 per share. (Source: Yahoo! Finance, op. cit.)

Free cash flow has been positive in the last five straight years, with nearly $100.0 million each in 2017 and 2018.

Fiscal Year Free Cash Flow (Millions) Growth
2014 $9.1
2015 $26.2 188.0%
2016 $23.4 -10.7%
2017 $99.4 324.1%
2018 $99.7 0.3%

(Source: MarketWatch, op. cit.)

There is some concern regarding the debt of $1.1 billion with the acquisition of Nutrisystem, but for now I don’t envision a financial problem. (Source: Yahoo! Finance, op. cit.)

Analyst Take

Tivity Health stock looks attractive, trading at 9.5 times its consensus EPS for 2020. Its price/earnings to growth (PEG) ratio of 0.87 is also reflective of an undervalued situation.

The significant short position will help add support if TVTY shares rally.

Successful integration of Nutrisystem could jump-start TVTY stock to much higher levels. Even if Tivity Health shares doubled in price, they would still have a reasonable valuation.