Tuesday, October 9, 2012

Watch Out For Weight Watchers

In one of my thematic articles "Obesity: How a Big Problem Can Lead to Investment Opportunities," I already mentioned several companies that can benefit from an effort to combat the growing obesity problem. Companies such as Herbalife (HLF), Lululemon Athletica (LULU) and several others are perfectly positioned to profit. Another company that came recently on my radar is Weight Watchers (WTW).

Weight Watchers is the world’s largest provider of commercial weight loss services, focusing on education and group support through its company-owned and franchise operations. WTW holds over 45,000 meetings each week, where members receive group support, and learn about healthy nutrition patterns, behavior modification and physical activity. WeightWatchers.com is the company’s subscription-based online weight management programme, and is the leading internet-based weight management provider in the world.

The company went through a difficult period between 2008 and 2010 with weak sales development and declining margins, which were attributable to a weak brand image and a weak economy. In 2010, WTW launched a three-part turnaround plan in an effort to strengthen brand image/recognition and to tap additional growth.

As a result of the turnaround plan, sales in the first nine months of this year grew almost 30%, gross margins improved 300 basis points (bps) to 57.9%, and earnings-per-share (EPS) surged 77% yoy. Although such excellent figures are unlikely to be sustainable, growth should remain at healthy levels in the coming years, with clear margin improvements, providing near-term strong growth visibility.

Growth Prospects

International

As the number of overweight and obese people worldwide grows, WTW has the opportunity to expand its global presence beyond its traditional U.S. and European (U.K./EU) focus. Big emerging countries, such as China and India, seem to be top on the agenda.

B2B

On the back of reduced work productivity, chronic absence from work, and high health care costs, employers in the US and Europe are getting increasingly involved in improving their employees' health. WTW is tying up with employers to promote its products, and plans to adapts its IT system to the reporting needs of employers. The B2B (Business-to-Business) approach should open up huge sales potential for Weight Watchers.

Distribution channel

With obesity now widely accepted as a major driver of health care costs, and obesity-driven diabetes even more prominent, WTW is partnering with Merck to bring its weight management expertise directly to doctors and health care professionals. A pilot outreach programme to place WTW in the doctors' office began in January 2011. The results are highly promising, as doctors are viewed as a reliable source of health information. Moreover, they have huge influence on the choices and decisions of their parents.

Conclusion

Dividend Yield (%) 1.13% EPS (curr. year) 4.10 USD
Price/book ratio (curr. year) n.a. EPS (next year) 4.65 USD
ROE (prev. year) P/E (curr. year) 15.07 USD
YoY EPS growth (curr. year) 61.42% P/E (next year) 13.29 USD

Weight management is a less capital-intensive, high margin business. Weight Watchers is an attractive player coping with globally rising obesity problem. The stock is currently trading at a 12-month forward price/earnings of 13.29x, largely in line with global food peers. The growth prospects are enormous and from a valuation perspective a P/E of 16 would be more in line with its long- term valuation average.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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