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Tivity Health's (TVTY) Shares Fall Despite Q3 Earnings Beat

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Tivity Health, Inc.'s (TVTY - Free Report) third-quarter 2020 results have failed to impress investors as the stock has moved down 2% since its earnings release on Nov 5 to close at $14.91 on Nov 11.

The company reported third-quarter 2020 adjusted earnings per share (EPS) of 72 cents, up 56.5% year over year. The figure beat the Zacks Consensus Estimate by a stupendous 125%.

The company’s GAAP loss was 87 cents per share, down from the year-ago period’s EPS of 29 cents.

Revenues in Detail

Revenues in the reported quarter fell 16.1% year over year to $254.9 million. The metric, however, surpassed the Zacks Consensus Estimate by 5.4%.

Segmental Details

Tivity Health operates through two segments — Healthcare and Nutrition.

In the third quarter, net revenues at Healthcare totaled $95.5 million, down 40.3% year over year. The decline was primarily due to a significant fall in SilverSneakers revenues of $56 million resulting from lower revenue-generating visits due to the pandemic.  Additionally, Prime Fitness revenues fell by $8.8 million primarily due to membership terminations and suspensions.

Nutrition business, which includes Nutrisystem and South Beach Diet, generated revenues of $159.4 million during the quarter, up 10.8% year over year. The uptick resulted from a 20% year-over-year growth in Nutrisystem brand DTC revenue.  However, this increase was partially offset by a decrease of $9.7 million in non-core channels.

For investors’ note, Tivity Health has entered into a definitive agreement with Kainos Capital to divest the Nutrition Business for a purchase price of $575 million in cash. The transaction is expected to close in the fourth quarter, subject to the receipt of regulatory approval and other customary closing conditions.

Margin in Detail

Gross profit rose 5.5% year over year to $132.1 million in the third quarter of 2020. Gross margin expanded by a huge 1061 bps year over year to 51.8% due to a 31.3% fall in cost of revenues.

Marketing expenses decreased 4.7% year over year to $44.5 million, whereas selling, general & administrative expenses fell 0.9% to $26.7 million. These drove down operating costs by 3.3% to $71.2 million.

Adjusted operating profit increased 18% from the year-ago period to $60.9 million. Adjusted operating margin expanded 691 bps to 23.9%.

Operational Update

Tivity Health exited the third quarter of 2020 with cash and cash equivalents of $56.4 million compared with $60.3 million at the end of the second quarter. Long-term debt at the end of third-quarter 2020 was $974.8 million compared with $1 billion at the end of the second quarter.

Cumulative net cash provided by operating activities at the end of the third quarter was $164.9 million compared with $84.8 million in the year-ago quarter.

Guidance

Tivity Health, based on the performance of the Healthcare segment in the quarter under review, expects the segment to generate revenues in the range of $425 million-$432 million for the year. However, this is significantly lower than the $633.1 million reported at the end of 2019.

Our Take

Tivity Health ended the third quarter of 2020 with better-than-expected figures. The company witnessed solid revenue growth in its Nutrition segment due to strength in Nutrisystem brand DTC, which is impressive given the challenging business environment. Expansion of both margins buoy optimism for the stock.

However, a year-over-year fall in the top line amid the pandemic-led business challenges is concerning. Also, a dismal performance by the company’s Healthcare business is disappointing. The full-year revenue projection for the Healthcare segment indicates a significant decline from the year-ago period, raising apprehensions about the stock.

Zacks Rank & Key Picks

Tivity Health currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader medical space are West Pharmaceutical Services, Inc. (WST - Free Report) , Thermo Fisher Scientific Inc. (TMO - Free Report) and Align Technology, Inc. (ALGN - Free Report) .

West Pharmaceutical reported third-quarter 2020 adjusted EPS of $1.15, beating the Zacks Consensus Estimate by 13.9%. Net revenues of $548 million outpaced the consensus estimate by 7.2%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Thermo Fisher, a Zacks Rank #2 company, reported third-quarter 2020 adjusted EPS of $5.63. The figure beat the Zacks Consensus Estimate by 28.8%. Revenues of $8.52 billion outpaced the consensus mark by 10%.

Align Technology reported third-quarter 2020 adjusted EPS of $2.25, surpassing the Zacks Consensus Estimate by 281.4%. Net revenues of $734.1 million exceeded the Zacks Consensus Estimate by 38%. It currently carries a Zacks Rank #2.

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