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Value, growth at reasonable price, contrarian, newsletter provider
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Weight Watchers (NYSE:WTW) aims to help people in their quest for improved fitness and health in 28 countries worldwide. Revenues come from meeting fees, product sales, franchising fees, brand licensing and publishing. After a spin-off from Heinz (NYSE:HNZ) and a 1999 LBO, it came public again on November 15, 2001 at $24 a share. From the IPO date through 2008, revenues and EPS grew steadily, before the economic downturn and an unfavorable UK tax ruling pushed down operating numbers for 2009.
Last week’s closing price seems to have discounted the less than stellar numbers from 2009. WWT had been seen (and priced) as a growth company with 2001 – 2007 multiples running mainly between 20x – 30x. This might have been justified when you look back at their numbers for that period.
Here are their per share figures from continuing operations as reported by Value Line:
Year
Sales
C/F
EPS
Div.
Avg. P/E
52-Wk Range
2001
5.91
0.81
0.66
Nil
49.4x
28.30 – 36.00
2002
7.62
1.41
1.31
Nil
31.5x
31.30 – 50.40
2003
8.88
1.71
1.59
Nil
26.4x
35.30 – 48.70
2004
10.01
1.88
1.70
Nil
22.9x
31.80 – 46.30
2005
11.45
2.14
1.94
Nil
25.0x
40.10 – 58.90
2006
12.65
2.24
2.06
0.53
22.3x
37.50 – 54.10
2007
18.48
2.79
2.50
0.70
20.2x
44.50 – 58.20
2008
20.21
3.14
2.76
0.70
14.0x
21.60 – 50.20
2009
18.17
2.65
2.30
0.70
10.9x
16.40 – 30.20
Consensus views are tightly bunched for 2010 and 2011 at about $2.41 and $2.51 respectively, making today’s P/E about 10.6x this year’s and 10.2x the 2011 expectations. Those are both extremely low based on all historical experience for WTW.
Dividends were initiated in 2006 and the well-covered $0.175 quarterly payout represents a generous (by today’s standards) current yield of 2.73%.
The balance sheet is adequate, though highly levered, with total interest coverage around 5.4x. This is a fairly predictable business. Value Line rates WTW’s ‘earnings predictability’ in the top 1% of all companies in their 1700 stock universe and notes the shares' ‘stock price stability’ is in the 85th percentile (with 100th being best).
Capital spending needs are minimal as most revenues are generated by meeting fees and royalties from both franchisees and licensing of brands. Capital spending per share has run from just $0.05 share to $0.23 over the entire eight years post-IPO.
There is no defined benefit plan and thus there are no pension deficiencies.
Target pricing for Weight Watchers shares would depend on the projected multiple you think is achievable in this lower growth rate environment. Value Line is assuming a normalized P/E of 17x in figuring their 3 – 5 year goals. Morningstar carries a present day ‘fair value’ of $41 implying that same 17 multiple. Morningstar rates WTW shares with their highest, 5-Star ranking.
Even a much more conservative 14 P/E on this year’s projection of $2.41 would bring these shares back to $33.74 or + 32% from last week’s closing quote. Add in the 2.7% yield and you’ve got a good chance for mid-30% total returns within 12 months.
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If you’re option savvy, here’s an attractive play for the next 6.5 months:
Sell
Put Premium /Sh.
Net Cost ‘If Put’
Margin of Safety*
October $25 Puts
$1.75
$23.25
9.0%
October $30 Puts
$5.20
$24.80
2.97%
* Percentage net cost ‘if put’ is below current price
If you chose to sell these puts you’d either get paid ‘not to buy’ or you’ll lock in prices from about 3% - 9% below the already low $25.56 share price.
Your maximum upside on the sales of these puts would be the premiums you collect when the puts are sold. On the $25 puts it would be realized even if the shares don’t go up at all.
The margin maintenance requirement is approximately 20% of the net exercise cost (under $5 per share in each case).

Disclosure: Author is long WTW shares and short WTW options.
Source: Gains Forecast for Weight Watchers International (In a Good Way)