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Weight Watchers International [NYSE:WTW $26.45] is a leading weight-management company with operations in 28 countries. Weight Watchers sells many branded food and related products and, each week, approximately 1.4 million people attend Weight Watchers meetings worldwide. The company encourages healthy weight loss through exercise, nutrition, and portion control. The company also offers Internet- and magazine-based weight-management products.

WTW was taken private in a 1999 leveraged buyout and then came public again on November 15, 2001 at $24 /share. Sales and earnings ramped up each year from the IPO date right through 2008. EPS for 2009 are likely to dip on a year-over-year basis from an all-time record $2.76 to about $2.62 this year.

Weight Watchers shares peaked above $58 in both 2005 and 2007 before dropping to an absurdly low $16.41 in early March as the US market cratered. Today’s close of $26.45 is just 10.1x this year’s and 9.5x next year’s Zacks estimates. It’s also lower than the absolute low prices touched at any time during calendar years 2002 – 2007.

Here are the impressive per share numbers from continuing operations as reported by Value Line:

Year

Sales

C/F

EPS

Div.

Avg. P/E

2002

7.62

1.41

1.31

Nil

31.5x

2003

8.88

1.71

1.59

Nil

26.4x

2004

10.01

1.88

1.70

Nil

22.9x

2005

11.45

2.14

1.94

Nil

25.0x

2006

12.65

2.24

2.06

0.53

22.3x

2007

18.48

2.79

2.50

0.70

20.2x

2008

20.21

3.14

2.76

0.70

14.0x

Despite substantial debt from the leveraged buyout total interest coverage is about 5x current earnings. Management felt comfortable enough with their balance sheet to initiate dividends in 2006 and to raise it to its present level in 2007. The $0.175 quarterly payout is good for a current yield of 2.64%.

Substantial share repurchases have helped support the per share earnings. From 2002 through June 30, 2009 the outstanding share count was reduced from over 106 million to about 77.1 million.

Value Line sees a 3 – 5 year normalized multiple of 17x and a mid-point target price of $62.50 by 2012 – 2014. Standard and Poors gives WTW 4-stars (out of 5) and is carrying a 12-month goal price of $35 /share. Morningstar assigns Weight Watchers their highest, 5-star ranking, and feels ‘fair value’ is $41 /share.

A rebound to even 15 times this year’s expectation of $2.62 would lead to a $39.30 share price – up 48.5% from today’s quote. Is that far-fetched? Not based on past history. WTW shares have changed hands above $50 at some point in each year 2005-2006-2007-and 2008 times when sales, earnings and cash flow were almost always lower than they are today.

It’s time to live off the fat of the land by ‘over weighting’ WTW.

Option savvy investors could also consider selling some April $25 or $30 puts.

The premium on the WTW $25s is about $2.10 for a $22.90 break-even and the $30s are paying around $5.00 for a $25 break-even with bigger upside if the shares do as expected.

Disclosure: Author is long WTW shares and short WTW puts.

Source: Scaling Into Weight Watchers