Weight Watchers is one of the world's leading weight-management companies with operations in more than 25 countries. Every week approximately 1.4 MM people attend weight watchers meetings worldwide. In 2009, consumers spent over $4 billion Weight Watchers branded www.weightwatchers.com, licensed products sold in retail channels and magazine subscriptions.
According to the Center of Disease Control and Prevention an estimated 66% of the adult population is overweight, and 34% is considered to be obese. The situation has not gotten better which has provided WTW with a tremendous opportunity to grow. WTW products appeal to consumers because of their respected name and their broad array of products that appeal to both help seeking, and self help people battling weight issues. Weight Watchers has over 15,000 leaders- each of whom has lost weight through the program, that are conducting over 50,000 meetings a week across the world. Food companies are tapping into the Weight Watchers brand by licensing it as a platform to foster new products aimed towards health conscious consumers. The Weight Management industry had revenue of approximately $59 billion in 2008 in the United States alone, so there is plenty of market share that can be tapped into in this highly fragmented industry. The depressed economy has crimped consumer spending and has halted growth for WTW. Weight Watchers has negative equity and negative tangible equity due to acquisitions and share buybacks above book value, but these measures don’t accurately reflect the franchise value of the company. Operating margins around 25% showcase the profitability of the business model, and we fully expect growth to continue as the economy recovers. Another indication of the strength of the WTW franchise is that in both 2007 and 2008 their CAPEX maxed out at $32MM. The company generated over $200MM in Net Income in both years without having to plow much of that cash back into the business which speaks volumes as to the Weight Watchers brand recognition and cost efficient infrastructure. Stocks trading at a free cash flow yield of 13% typically are in dying industries or are overly leveraged companies, but WTW has ample opportunity to pay down debt with over $250MM in free cash flow per year. In 2008 WTW formed a joint venture with Danone Dairy Aisa to establish a weight management business in the People’s republic of China where WTW will own 51%. WTW has significant operations in the UK and Europe but we see a ton of growth potential in Asia through similar licensing deals. Investment Strategy We are recommending buying the stock and selling a January 2011 at the money put on WTW. Our feeling is that there is a tremendous amount of upside from these levels so we want to own the shares outright. We don’t profess to know when the stock will move so by selling the at the money put we are collecting premium and at worst reducing our cost basis on the position.
We are recommending buying the stock and selling a January 2011 at the money put on WTW. Our feeling is that there is a tremendous amount of upside from these levels so we want to own the shares outright. We don’t profess to know when the stock will move so by selling the at the money put we are collecting premium and at worst reducing our cost basis on the position.
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