With the debate continuing to rage around how the government will “fix” our healthcare system, one potential bright spot is in the supplements arena.  NBTY, Inc. (Symbol: NTY), formerly known as Nature’s Bounty, reported a 21 percent rise in 4Q net sales as reported on October 13th.  This of course missed analysts estimates and the stock was beaten down from $27.32 to an open today of $24.22.  The five analysts on the FirstCall platform were looking for a sales number of $614.78 million, where poor NBTY could only bring in $602 million for the quarter.

Looking at the healthcare sector in general, which has performed slightly better than the overall market, we are finding lots of companies that have significant upside given their sales and cash numbers.  But NBTY is also interesting to us at Ockham because of its sales model, retail focus and distribution.  Now we’re not saying that adding supplements is a way to improve one’s health, that’s for the doctor’s to opine upon, but we do think that as people struggle with rising healthcare costs, they may look more and more to alternative measures to keep or boost their health.

From our perspective, the numbers posted by management for NBTY are looking positive.  When combined with the punishment the stock has taken in the overall market and the potential for real growth given the focus of the economy on health and more specifically, preventative health, we are continuing to view NBTY as undervalued at this point.

When we looked at our model for NBTY this weekend (and the stock price was still $26.43 at the time), our Price to Cash Earnings numbers demonstrated that NBTY was currently trading 34% below its historical norms.  So given the price action in the last few days, that percentage would be even higher.  We stress patience with these types of stocks, because generally, just because they get to such low valuations, it doesn’t mean the market is ready to acknowledge it.  Even with good numbers in a terrible market, it is hard to scream above the noise at this point.

In the interest of full disclosure, Ockham Research does not trade in any of the securities it follows.  Ockham Research is affiliated with an independent registered investment advisor which may or may not have positions in the stocks Ockham follows.  Ockham Research has no control over investments or accounts at this affiliated investment advisor.