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Stock Strategist Industry Reports

Weight Watchers Looking Rather Attractive

After shedding 36% since March, the post-first-quarter sell-off represents a compelling entry point to this wide-moat firm's stock.

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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.

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%.

Peter Wahlstrom does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.