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Forty-Bagger in Weight Loss

Weight management company NutriSystem (Nasdaq: NTRI  ) is reporting spectacular operating results for 2005. Revenue rocketed 459%, and net income per diluted share was up almost 20 times what it was in 2004. Those are fat numbers!

That revenue surge wasn't loaded to the first part of the year, either. Fourth-quarter year-over-year sales growth was an amazing 783%, and income swung from a loss to a profit.

Such an operating performance doesn't go unnoticed by investors. The stock has been up as much as $6.29 a share (16.7%) in today's trading -- and investors who liked the shares at its August 2004 low are now holding a 40-bagger.

Investors interested in these shares have a number of positives to consider. The explosion in growth will allow the company to triple its advertising budget in the first quarter of 2006, while also keeping its cost of acquiring new customers at the same level as 2005. Ah, the benefits of economies of scale.

The company expects first-quarter sales to increase by 225% and net income of between $0.40 and $0.42 a share (excluding stock-based compensation expenses of up to two cents). Those earnings are up over four times the $0.10 earned in the first quarter of 2005. For the entire year, the company expects to earn between $1.36 and $1.46 (excluding up to $0.07 a share in stock-based compensation costs). That's up nicely from the $0.59 a share for all of 2005 and prices the stock at a reasonable 32.4 times the low guidance for 2006.

Reasonable? 32.4 times earnings? That's right! Analysts expect the company to compound earnings by 37% annually for the next five years (versus a 10.5% increase for the S&P 500). That's growth that, at today's valuation, is not priced excessively.

And there are new opportunities for future growth. In December 2004, the company paid $1 million for Slim and Tone, a small franchisor of express fitness centers (30-minute workouts) for women. What better combination than diet and exercise? At the same time, the company launched three customized programs for men, vegetarians, and those suffering from Type II Diabetes. The men's program holds great long-term potential because it offers an easy way to gain nutrition and exercise information, on-call help, and at-home meal delivery of specially tailored meals. Oh, and later this year you can expect to see a diet program aimed at seniors.

Be aware that there's a lot of competition. Jenny Craig, Weight Watchers (NYSE: WTW  ) , and (Nasdaq: DIET  ) offer home food delivery services, and announced a chef-prepared, fresh food delivery service in January. Then there are the South Beach diet offerings available from Motley Fool Income Investor recommendation Kraft. And don't forget the pharmaceutical companies. Arena Pharmaceuticals (Nasdaq: ARNA  ) and Sanofi-Aventis (NYSE: SNY  ) are developing diet pills that they hope will offer weight-loss help without the side effects of currently available drugs.

But for now, it seems to me that NutriSystem offers investors a cash-loaded balance sheet, explosive growth, and an earnings multiple that's easy to digest.

Fool contributorW.D. Crottydoes not own any shares in the companies mentioned but is in need of a more aggressive diet. Clickhereto see The Motley Fool's disclosure policy.

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