The weight management industry is massive with immense competition, yet Weight Watchers International (WTW, Financial) has carved out a nice niche in the $60 billion sector. And the stock has rebounded well from a sub-$4 per share level in 2015, thanks to Oprah. The media guru bought $43.5 million worth of stock in October of 2015 and despite selling some of her shares for 10x, she still owns over 10% of the company.
Weight Watchers is still not a growth story, but it’s easy to see why Oprah would have wanted to buy in when she did. The company’s operating income for 2015 was higher than its market capitalization during the period leading up to Oprah’s investment.
In the last 12 months, the company has generated $243 million in net income on $1.5 billion in revenue, good for earnings per share of $3.49, which when judged against the stock price makes the stock look cheap. And it is cheap — cheap as in a bargain, because while Oprah scored a major win with the stock, she seems to be integral to the brand's success, and that will lead to long-term value creation for shareholders.
Don’t forget that Weight Watchers was one of if not the first health food subscription service.Currently, the company has about 1.4 million active meeting subscribers and 2.9 million active online subscribers that benefit from 24-7 online expert chat and personal coaching weight-management solutions. Now, the company is in a rebranding push, developing WW.com, “For Every Body,” which seeks to acquire subscribers outside of the weighloss segment.
Is the company worth $2.1 billion? Certainly, especially given that the stock is priced below industry averages on every multiple. If it earns over $3.50 per share as expected, and returns to a more reasonable price-earnings ratio (15x), then the stock would price above $50 again. At 20x, the price would rise to $70. This is a good range considering the company does have brand power. Again, even in the middle of 2015, when the stock was trading at ridiculously low levels, the actual business was still booking profits.
It’s a great business with or without Oprah, thanks to its massive subscriber base and low capital spending, but the Oprah factor is huge. Now she’s recruited Kate Hudson. The $100 per share level is still within reach if investors can withstand the bumpy ride.
Disclosure: I am not long or short WTW.
