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Stock Analyst Update

Weight Watchers Looks Strong but Pricey

We see few near-term downside catalysts as CEO Mindy Grossman's plans take shape.

Mentioned:

 Weight Watchers (WTW) remains in a position of strength as it heads into its 2018 recruitment season. Subscribers grew 18% year over year (24% online, 11% meetings), new-member retention rates remain healthy at roughly nine months, and we're seeing best practices from the U.S. applied to the U.K. and continental Europe to drive positive online/meeting paid-week trends. Total revenue growth accelerated to 15%, validating the broader consumer appeal of the "Beyond the Scale" platform. Reported operating margins expanded 450 basis points to 28.2% and serve as a reminder of the firm's inherent operational leverage. We also see several exciting developments that CEO Mindy Grossman has on tap, including a new SmartPoints food plan offering greater flexibility, using technology assets for a more personalized member experience, developing a more global brand, and exploring new licensing opportunities.

At this point, we think no-moat Weight Watchers' investment thesis has moved past its ability to adapt to weight-management industry changes, and instead toward asking what long-term assumptions are the appropriate ones to value this company. There was nothing in the updated 2017 guidance--$1.3 billion in revenue (implying 13% top-line growth) and EPS of $1.77-$1.83 (versus $1.57-$1.67, with half of the increase from current momentum and half from a lower tax rate)--that struck us as unreasonable. For 2018, we expect the firm will exceed the $1.4 billion revenue threshold needed for its 2018 net debt/EBITDAS target of 4.5 times (assuming revenue of $1.45 billion and mid-20s operating margins). With high-single-digit revenue growth and operating margins around 30% looking increasingly achievable from 2018 to 2021, we're planning a moderate increase to our $30 fair value estimate. While the market is pricing more aggressive medium-term assumptions, we concede that market expectations for 2018 look realistic and we see few near-term downside catalysts as Grossman's plans take shape.

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