A Bet on New Year’s Resolutions

01/18/2010 11:27 am EST


Paul Larson

Editor, Morningstar StockInvestor

Paul Larson, editor of Morningstar StockInvestor, and analyst Warren Miller say a brand-name weight-loss firm should continue to profit from people’s good intentions.

Weight Watchers International (NYSE: WTW) is a leading weight-management company with operations in more than 25 countries. Consumers bought $4 billion of Weight Watchers-branded products in 2008, and every week approximately 1.4 million people attend Weight Watchers meetings worldwide.

The company encourages healthy weight loss through exercise, nutrition, and portion control. Weight Watchers also offers Internet- and magazine-based weight-management products.

According to the Center for Disease Control and Prevention, an estimated 66% of the adult population of the US is overweight, and 34% is considered obese. Worldwide, nearly 1.6 billion people are considered overweight or obese. Increasingly inactive life styles and unhealthy food are often blamed for the growth of the number of overweight people, and we see no evidence that this trend will slow in the foreseeable future.

Weight Watchers is the largest provider of weight-management solutions, and it captures nearly 3% of the highly fragmented $55-billion global market. Weight Watchers adds value for its customers by making the weight-loss process easier with group-based support and easy-to-understand dietary guidelines.

Since the Weight Watchers approach is based on member participation, its meetings hold greater value as participation increases, because a start-up, meetings-based organization would have a very difficult time luring members away from Weight Watchers’ established meetings. We do not see any competitive threat that would erode Weight Watchers’ economic moat in the foreseeable future.

No other company can match the Weight Watchers’ support infrastructure of 15,000 leaders who run more than 50,000 weekly meetings in which members discuss weight-loss challenges, set goals, and monitor progress. In addition, the Weight Watchers brand is so trusted that large food companies and restaurants have begun licensing the brand for use in the advertising of their own products.

We believe that Weight Watchers will be able to increase revenue at an annualized rate of 1.6% during the next five years. This is lower than the 13% annualized growth the company has realized since 2002, because we believe that the global economic downturn will put pressure on demand for weight-management products in the short term.

Weight Watchers should also gain operating leverage as it grows. Weight Watchers has a reputable and differentiated product in an industry that is rife with false claims. The company benefits from a wide moat because it would be extremely difficult for a competitor to replicate the company’s brand recognition and meeting infrastructure to compete with Weight Watchers in a significant way.

Weight Watchers can continue to capitalize on its strong brand in several ways. Its licensing revenue has only scratched the surface with eight licensees in the US and 11 more abroad. In addition, it should have an easier time expanding internationally.

Our fair value estimate is $41, and there appears to be a sufficient margin of safety to consider buying today. (It closed above $29 Friday—Editor.)

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