GNC Is a Healthy Stock Buy

Last May, GNC Holdings (NYSE:GNC) launched its initial public offering. Although this IPO didn�t generate quite as much buzz as last year�s big internet IPOs like Groupon (NASDAQ:GRPN) or Pandora Media (NYSE:P), this stock was one of last year�s biggest success storeis�appreciating almost 140% in the past 12 months.

But recently the stock consolidated after the FDA moved to block the marketing of an ingredient used in several of the company�s nutrition supplements. Let�s review this company and see if it still has upside potential after this development.

Company Overview

GNC, which stands for General Nutrition Centers, is the third-largest drug store chain in the industry. The company specializes in weight loss, bodybuilding and nutritional supplements but also stocks vitamins and natural remedies for a variety of ailments. Based in Pittsburgh, Pennsylvania, the company has over 7,300 locations worldwide and brought in over $1.8 billion in sales in 2011.

Earnings Buzz

GNC Holdings announced its first-quarter operating results at the end of April. Compared with the same quarter last year, net income surged 545% to $63.9 million. Adjusted earnings weighed in at 60 cents per share, which topped the 52 cents consensus estimate by 15%.

Over the same period, consolidated sales jumped 23% to $624.3 million; analysts forecast $587 million in sales, so the company posted a 6% sales surprise. The company has also upwardly revised its 2012 earnings guidance to $2.05 per share and its sales guidance to $2.37 billion. This tops the Street view of $2.31 billion in annual sales.

FDA Warning

After the stunning first-quarter earnings announcement, shares of GNC climbed to a new high, but a few days later the stock consolidated after the FDA warned GNC and nine other companies about the use of an ingredient called DMAA.

In a nutshell, the FDA asserts that DMAA cannot be the primary ingredient in nutritional supplements because it hasn�t been properly tested and it may lead to heart and nervous system problems. Although shares of GNC dipped slightly on this news, analysts say that this should not set the company back because GNC only derives about 2% of its total sales from DMAA products.

So, while GNC would do well to comply with all FDA regulations, this shouldn�t impact the company�s top or bottom lines too much.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. Because GNC Holdings Inc. has now been publicly traded for a little over a year, this stock was added to my Portfolio Grader system in March.

Since then, the stock has maintained its A-rating, thanks to solid fundamentals and stellar buying pressure. The company is especially strong in terms of earnings growth, earnings momentum, analyst earnings revisions as well as return on equity.

GNC is also doing well in terms of sales growth, operating margin growth, and its track record of beating analyst earnings estimates. The only real area of improvement is cash flow, so this stock receives a B-rating for its overall Fundamental Grade.

That, paired with an A for its Quantitative Grade, makes this an A-rated stock.

Bottom Line: GNC is an all-around solid company; this is an A-rated buy.

Recommendation: A-rated Buy

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