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Weight Watchers: Attractive Figures
12/10/2004 12:00 am EST
"Weight Watchers’ has attractive figures," quips Stephen Biggar, who has chosen the issue as the latest "stock of the week" for Standard & Poor’s The Outlook. Here, the head of US equity research discusses potential gains from this leader in weight loss.
"Rising rates of obesity have grabbed the
spotlight in recent months, so it may seem surprising that shares of Weight
Watchers International (WTW NYSE) haven't bulked up, relative to the overall
stock market over the past year. The company is the world's leading provider of
weight-loss services, and we believe this is an opportune time to purchase the
shares, based on what we view as an attractive valuation and the outfit's
long-term prospects. With the growing problem of obesity in developed countries,
especially in North America, we believe it is well positioned to benefit as
individuals and institutions attempt to tackle this issue.
"We also believe Weight Watchers has an attractive business model, which drives high profit margins and strong cash flow. Weight Watchers operates in 30 countries. Its programs aim to help people lose weight and then maintain those losses. At the core of Weight Watchers' business are weekly meetings, which promote weight loss through education and group support in conjunction with a flexible, healthy diet. Each week, over 1.5 million people attend approximately 46,000 Weight Watchers meetings around the world, which are run by over 15,800 classroom leaders.
"Weight Watchers maintains high margins and generates strong cash flow due to its low variable expenses and low capital expenditure requirements. Revenues are primarily generated from the collection of meeting fees (64% of the 2003 total) and product sales (29%). The costs involved in running a meeting are low, with part-time class instructors being paid on commission, and many meeting locations rented on an hourly basis. The company's businesses are highly profitable, with gross and operating margins averaging over 53% and 34%, respectively, over the past three years. Meeting fees are paid upfront or at the time of the meeting by attendees, which results in net negative working capital for Weight Watchers— an indication of cash-flow efficiency.
"Given its leadership position, we believe it is
well situated to benefit from the growing trend of obesity in developed countries and
to weather the storm of what we regard as short-lived fad diets. We expect
that improvement in North American attendance will be the main catalyst for
the stock over the next 12 months. We think comparisons of results in upcoming
periods vs. the prior year should be favorable. And with the shares attractively valued,
in our view, we believe Weight Watchers will significantly outperform the
S&P 500 over the next 12 months. The stock carries Standard &
Poor's highest investment recommendation of 5 STARS, or strong