With its widely recognizable PointsPlus and ProPoints programs, Weight Watchers (WTW)has established not only a successful weight management program but a business model that generates substantial cash flow.
We like the long-term prospects of this wide economic moat firm, but we acknowledge that the next few quarters could be choppy, given recent miscues. Specifically, in the first six months of 2012, Weight Watchers reported hiccups related to its emerging corporate and international businesses, and management has drawn criticism over the timing of its $1.5 billion "modified Dutch auction" tender offer. Since mid-March, shares are off 36%, compared to a 1% drop in the S&P 500 Index.
Bariatric Surgery
Shares currently sit in 4-star territory at a more than 30% discount to our $77 fair value estimate and, at 11.6 times our 2012 earnings per share estimate, we view Weight Watchers' stock as a solid medium-term idea for investors. We believe that as global macroeconomic headwinds normalize over the next few years and as the firm laps its largely self-inflicted slips, Weight Watchers can deliver double-digit earnings growth while generating returns on invested capital of nearly 40%.
Weight Loss Surgery
A Heavy Revenue Stream
Weight Watchers' strong reputation in an otherwise fragmented and at times disreputable industry has earned it a wide moat. The company's focus on sustainable weight loss has built its brand reputation to the point where food manufacturers are licensing it for use on their products. In our view, it would be extremely difficult for a competitor to replicate the company's 45,000-member-driven group meetings per week where fee-paying customers gather to talk about the challenges of weight loss.
The meetings are run by 12,000 group leaders--each of whom has lost weight on the Weight Watchers program.
The Weight Watchers business concept has grown steadily, evolving over the last 50 years to become the world's leading provider of weight management services. In 2011, consumers around the globe spent nearly $5 billion on Weight Watchers-branded products and services, both in person and online. We estimate that worldwide meeting attendance in 2012 will exceed 52 million, while the number of weightwatchers.com subscribers will top 2 million.
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