In business for more than 5 decades, the undisputed king of diet and nutrition isn’t about to let an overpriced market outshine its high-margin, high-cash flow success…
While the majority of celebrities and performers have a shelf-life where they peak and fade to obscurity, there are rare instances where some of them transcend time and are likely to stay relevant until they pass on.
Paul McCartney and Betty White are a few who come to mind.
The same can be said of the business world.
Whenever a new trend permeates the market, there are companies that seemingly spring up out of nowhere, quick to pounce on the fad in the hopes of being as successful as they can before they too become obsolete.
Most will fail. But some businesses are able to stand the test of time and maintain their staying power through the generations.
Just think of the pioneers of cars (like Ford), fast food (think McDonalds), and big-box retail (such as Wal-Mart) who are still market leaders to this day.
When the diet craze came into prominence during the fifties and sixties, it was Weight Watchers International (NYSE:WTW) that blossomed into an industry leader, and that’s where it’s remained.
Endless companies have tried to introduce their own version of a weight-management program through the years, but few have come close to replicating Weight Watchers’ successful formula.
WTW’s core philosophy is to use a science-driven approach to help participants lose weight by forming helpful habits, eating smarter, getting more exercise and providing support.
The key to their program is the idea that no food is off-limits. Rather, the primary goal for participants to is develop a calorie deficit whenever they eat.
A 2013 study by Baylor College of Medicine found that overweight and obese adults following Weight Watchers lose significantly more weight in six months than those who tried to lose weight on their own.
To help people succeed in the program, they’ve established in-person and group meetings, a simple-to-follow points system to guide eating habits, and with the advent of the Internet, a popular online-only program to capture a bigger market share.
Helping to boost its reach were influential spokepersons through the years, including the Duchess of York Sarah Ferguson, singer/actress Jennifer Hudson, and singer Jessica Simpson.
WTW generates its income through meeting fees, Weight Watchers branded food and other products, and Internet program revenues.
All this helped them to become a $1.7 billion a year business in 2013 with a profit margin of over 58%.
But why is the stock so down in the dumps?
Revenues slipped last year compared with 2012 and 2011, as meeting fees and product sales declined. The Company is estimating revenues will decline to $1.4 billion in 2014.
Further weighing down its stock is its debt load. They have approximately $2.36 billion in long-term debt — almost double how much they had in 2012 before they decided to undergo a stock repurchase with borrowed funds (which was around $82/share at the time).
But where their bread and butter, face-to-face business have lost some ground, internet revenues have helped pick up some of that slack.
I see this as WTW’s key growth area going forward, along with other technology solutions.
WTW’s net income in 2013 was $204 million with a solid free cash flow (FCF) of $260 million. Notably, the company has achieved over $200 million FCF in each of the last 10 years.
Despite the stock price declining on lower projections in the near term, management has stated their commitment to servicing its debts and projects revenues to climb to $2.0 billion by 2018.
At the end of the day, Weight Watchers has proven itself since 1963 to be a weight-loss program that’s worked for many people.
It’s not about intense dieting or extreme exercising, or any of the other quick-fixes that have come and gone through the years.
There’s something to be said about a sensible approach to healthy eating, calorie and portion control, and peer support that Weight Watchers has fine-tuned in a way that no other company has.
And unless a game changing new solution comes to market, Weight Watchers will continue to be one of the most popular dieting options for people.
My recommendation is not to buy at this time, but to keep it in your peripheral vision over the next two quarters.
If management sticks to their guns on debt management, and the stock shows some signs of sustained life, that’s when it’s time to make a move.
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