When I said it was too early to buy NBTY (NTY), unfortunately I didn’t mean a day or two early. The stock was up nicely this morning after an analyst upgrade.

Analyst Upgrades NBTY, Stock Surges: Financial News - Yahoo! Finance

Shares of NBTY Inc. surged Wednesday as an analyst upgraded the nutritional supplement maker, citing its solid sales and an attractive stock price.Edward Aaron of RBC Capital Markets said he is more comfortable with his NBTY estimates now partly because the Bohemia, N.Y.-based company recently reported improved sales. Last month NBTY said its January sales rose 6 percent, as strong wholesale results offset a weak retail environment.

As I said in the original article, though NTY looks fairly cheap so do most retailers and consumer companies. Unless we can get through another quarter without a significant earnings miss or downward revision it just seems too early to call a bottom here.

I still think there is better opportunity in names like Tupperware (TUP) or Coach (COH).

Disclosure: At time of publication, William Trent has no position in the companies mentioned.

This article is a reprint of my March 4, 2008 RealMoney column

When I started looking at NBTY (NTY) when it showed up on one of my screens recently, I realized a good chunk of my typical Whole Foods (WFMI - Annual Report) bill was going to their products. NBTY makes vitamins, sport supplements and other products under the brand names Nature’s Bounty, Vitamin World, Puritan’s Pride, Holland & Barrett, Rexall, Osteo-Bi-Flex, Flex-a-min, Knox, Sundown, MET-Rx, WORLDWIDE Sport Nutrition, American Health, DeTuinen, Le Naturiste, SISU, Solgar, and Ester-C.

The health food shops where I pick up my supplements (which are served through NBTY’s wholesale segment) account for nearly half the company’s total sales. The North American Retail segment (457 Vitamin World and 80 Le Naturiste shops) provided 11% of 2007 sales, European Retail (626 stores under a variety of brand names) was 31% of company revenues and the Direct Response/e-commerce segment provided 10%.

These are clearly consumer products, clearly discretionary, and clearly at risk to a consumer slowdown. Given a price of just over ten times earnings and a 10% free cash flow yield, it is also clear investors are aware of this. However, there could still be some downside given that in 2000 valuations troughed at 8.8 times earnings and 0.6 times sales.

For NBTY, the slowdown hit hard in the December 2007 quarter with flat sales and falling margins. That said, the company appears well prepared to weather a slowdown, having cut its debt load from $500 million to $210 million over the last two years. Moody’s recently upgraded its outlook to positive, which is nice for a company with high yield debt in a time of extreme credit market jitters.

The wholesale division has been the company’s strong point, with improving gross margins over the last year. The other half of the business has been poor, requiring store closings in North America. Although European retail performed relatively well in 2007, it was primarily due to currency related issues. In the first quarter, European retail sales declined 4% in local currency.

NBTY is trying to right the retail ship through its store closings and other cost saving moves. The company ended 2007 with 35 fewer stores than it started with. 71 leases are due for renewal in 2008, and the company expects to close 23 more in 2008. NBTY also plans 10 to 12 new store openings this year. In the first quarter, five stores were closed and two opened. These efforts will only be made more difficult if a recession materializes.

I have a few concerns over earnings quality. For example, in each of the last two years the company has reserved less than the actual amount charged for sales returns, bad debt and promotional incentives (an under-reserving trifecta.) However, overall earnings quality measured using the accrual ratio appears strong.

Source: Zacks Research Wizard, compiled by William A. Trent

I’m also nervous about a stock that has had such a big run over the last few weeks. But then again, I had the same concerns about Tupperware (TUP) and it has continued to outperform after rebounding from the same January low. (As a side note, American Oriental Bioengineering (AOB) could represent a catch-up play here.)

The options aren’t generating a particularly good premium right now, so there doesn’t seem much point to a put-write strategy. On the other hand, buying the March $25 puts for $0.15 (as I am writing this) seems like fairly cheap insurance on a long position, given my concerns about the recent run-up.

All in all, though NTY looks fairly cheap so do most retailers and consumer companies. Unless we can get through another quarter without a significant earnings miss or downward revision it just seems too early to call a bottom here.

Disclosures: William Trent has no positions in the stocks mentioned.

Zacks Investment Research has provided Stock Market Beat with a complimentary trial subscription to Research Wizard.

Genentech 2Q profit rises 41 percent:

In a pattern now long familiar to investors in one of the world’s largest biotechnology companies, Genentech Inc. again reported a surge in profit, crediting its best-selling cancer drug for its continued hot streak.

Yet the stock is down on the news. As I noted in my earnings preview:

Genentech (DNA - Annual Report), which I own in my personal account, reports on Wednesday. They should beat the $0.71 consensus number, but the cancer treatment approvals aren’t coming as fast and furiously as they used to.

But the story is far from over. The good news: During the quarter, the company began eight Phase III clinical trials. Those studies include Lucentis as a possible treatment for eye problems caused by diabetes and Avastin for a specific form of lung cancer and as a second-line treatment for colon cancer.

Hopefully some of those will set the approval train rolling again.

Disclosure: Author is long Genentech at time of publication.

Mid Cap Watch List (Track at Marketocracy) member American Oriental Bioengineering (AOB), which will also join the Small Cap Watch List (Track at Marketocracy) as of Friday afternoon, has announced it will issue a secondary offering for 8 mln shares:

Pharmaceutical company American Oriental Bioengineering Inc. (AOB.N: Quote, Profile , Research) said in a regulatory filing that it will offer 8 million shares and selling stockholders will sell 500,000 shares.The company expects about $63.8 million in net proceeds from the sale, assuming an offer price of $8.60 per share. It plans to use the proceeds primarily for sales and marketing of products, acquisitions and research and development activities.

True, the company is spending $30 million to acquire a Chinese company. But the company already has $90 million in cash on the balance sheet and no debt. It also has consistently generated enough free cash flow to replenish its account. With the stock down more than a third since the January highs, I am perplexed by the decision to issue shares right now. To me it suggests there is either another very large acquisition in the works, or management is concerned about the future cash flow.

Insiders, by the way, are selling about 7% of the shares being offered, although they will still be significant shareholders.

With the end of the first quarter approaching, it is time to adjust the names in my Watch Lists. I will price all the new lists as of the close on Friday, June 29.

Today I present my planned updates to the Small Cap Watch List. There was a fairly high level of turnover to the list. 12 of the 24 names from the previous run made it to the current list, which was also 24 names. Performance-wise, the list created in March has returned an unweighted average return of 2.6% through June 28, with 80% of the stocks in positive territory. All of the money-losers from the previous list fell out of consideration.
So without further ado, the names on the chopping block from the previous list are: PW Eagle (PWEI), Insteel Industries (IIIN), Allied Defense (ADG - Annual Report), Hartmarx (HMX), Parlux (PARL), Hansen Natural (HANS), FirstFed Financial (FED), Young Innovations (YDNT), ITT Educational (ESI), Rent-a-Center (RCII), Valassis (VCI), and Travelzoo (TZOO). The castaways include four of the five money losers from the previous portfolio (HMX, PARL, YDNT and TZOO) as well as the biggest gainer (ESI).
The new list is:

I will continue to track both lists on StockPickr.

The Economic Calendar looks pretty dull next week, with only Friday’s PPI report likely to get us excited. Look for our usual industry pricing power report.

Looking less dull is the earnings calendar, as earnings season officially begins.

• Research in Motion (RIMM) reports on Tuesday. Consensus is calling for $0.99 EPS on $933 million in sales, and guidance of $1.04 on $994 million for next quarter. We’re taking the under.
• Genentech (DNA - Annual Report also reports on Tuesday. Consensus wants $0.67 EPS on $2.75 billion in sales and guidance of $0.71 on $2.9 billion for next quarter.
• Lam Research (LRCX) reports on Thursday. Consensus expects this quarter and next to bring in about $1.06 on $645 million in sales. We are expecting order flow to disappoint.
• Infosys (INFY) reports on Friday.  Consensus wants $0.40 on $865 million in revenues, and guidance for $0.40 on $920 million. They will make the numbers, but investors will listen closely to the update on visas and employee retention.

William Trent currently owns put options against the shares of Lam Research (LRCX).

With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Large Cap Watch List (Track at Marketocracy).

Though less than the Small Cap Watch List and Mid Cap Watch List (Track at Marketocracy), there was still relatively high turnover in this list. 14 of the original 33 names made the cut for the new list (which was trimmed to just 26 names.) Part of the reason for the turnover was to reduce overlap between the lists. One third of the Mid Cap Watch List (Track at Marketocracy) names appear on each of the Small Cap and Large Cap Watch List (Track at Marketocracy)s, but there is no longer any overlap between small and large.
So without further ado, the names on the chopping block from the previous list are:

3M (MMM); Continental (CTTAY.PK); Mitsui (MITSY); Anheuser-Busch (BUD); ConocoPhillips (COP); Helix Energy (HELX); IndyMac Bancorp (NDE - Annual Report); Barr Pharmaceutical (BRL - Annual Report); Quest Diagnostics (DGX); Public Storage (PSA); ITT Educational Services (ESI); Equifax (EFX); Rent-a-Center (RCII); Kroger (KR); Ricoh (RICOY); First Data Corp. (FDC); Expeditors International (EXPD); and Keyspan (KSE).

The new list is:

Every portfolio is going to have some winners and losers, and the Watch List we created in June, 2006 is no different. The all-cap watch list proved more cumbersome and difficult to measure than we had expected, so we switched to three separate, smaller watch lists that will be updated more regularly, but we still keep track of what is going on in the original list.

On the loser side, the Watch List had more than its share of homebuilders and subprime lenders. However, the overall portfolio has fared well due to an offsetting number of takeovers at premium prices. Beckman Coulter’s (BEC - Annual Report) buyout of Biosite (BSTE) today is an example.

M&A Monday: Beckman Coulter Buys Biosite: Financial News - Yahoo! Finance

Beckman Coulter Inc., which makes biomedical laboratory instruments, said Sunday it will buy diagnostic product maker Biosite Inc. for $1.55 billion.

Beckman Coulter’s offer comes to $85 per share. The price is a 53.5 percent premium on Biosite’s Friday closing price of $55.38 on the New York Stock Exchange. The deal is expected to close in the second quarter of this year.

That’s how we want to see our stocks go out.

Large Cap Watch List (Track at Marketocracy) member Barr Pharmaceuticals (BRL - Annual Report) reported a GAAP Loss:

For the three months ended December 31, 2006, the Company recorded a loss of $390.9 million, or $3.67 per share, compared to net earnings of $94.9 million, or $0.88 per share, for the same period last year. Revenues in the period were $584 million, compared to $326 million for the same period last year.For the six months ended December 31, 2006, the Company recorded a loss of $338.2 million, or $3.18 per share, compared to net earnings of $178.1 million, or $1.66 per share, in the prior year period. Revenues in the period totaled $916 million, up from $636 million for the same period last year.

Adjusted earnings per fully diluted share for the three and six months ended December 31, 2006 would have been $0.83 and $1.70, respectively, after excluding certain charges that are primarily related to the PLIVA acquisition. For comparison purposes, in the prior year periods, adjusted earnings per fully diluted share for the three and six months ended December 31, 2005 would have been $0.92 and $1.77, respectively, excluding certain one-time items.

Consensus estimates, presumably excluding the charges, were for $0.73. But the guidance for the rest of 2007 was disappointing relative to consensus (which was for $3.23 on $2.57 billion in sales):

The Company expects its adjusted earnings per fully diluted share for the year ending December 31, 2007 to be in the range of approximately $3.00 - $3.30. The adjustments are discussed in the paragraph immediately below. The Company expects total revenues for that period to be in the range of $2.3-$2.4 billion. R&D investment for 2007 is expected to be approximately $240-$250 million. SG&A expenses for 2007 are expected to be approximately $775-$800 million.

The Company’s adjusted guidance for 2007 excludes amortization costs associated with acquired products, charges related to the step-up of inventory acquired from PLIVA, contributions from operations that the Company anticipates divesting during 2007 and stock-based compensation costs. The Company’s adjusted guidance for 2007 also excludes the impact of potential patent challenge outcomes or other business development activities that may be completed by December 31, 2007.

That’s a lot of things to be excluding and still miss the estimates out there.

We asked, but no one answered. So we are taking our own counsel and breaking our Watch List into three portfolios: Small Cap, Mid Cap and Large Cap. Each will be tracked against the relevant S&P index going forward from their collective inception date of January 31 (priced at the close of market trading that day.)

For your viewing pleasure, the Large Cap Watch List (Track at Marketocracy) (to be measured against the S&P 500) follows.

Astute observers will notice less overlap between this watch list and the names in the Small Cap Watch List and Mid Cap Watch List. This was not for lack of overlap, as the smallest S&P 500 name has a market capitalization of $600 million, which would allow for complete overlap with the Mid Caps if we chose. Instead we selected an arbitrary low of $2 billion for large-cap names, which cuts off five names that are actually in the S&P 500.
In addition, we will provide a “quick and dirty” analysis of each name, with a goal of one such analysis per day. As the name implies, the quick and dirty analysis will be incomplete. We are hoping you will join in the debate and fill the gaps in our analysis.