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No need to introduce Weight Watchers. [[WTW]] was put in the investment pipeline as it is a 5-star, wide moat stock, according to Morningstar. The company currently trades ~ $31

Please refer to the Quick review explained post if you have questions on what I look for in this analysis.

1- Business Performance Risk (-) and Intrinsic returnes (-)

Metric

Status

FCF / Sales

Last twelve months: 17.1%, in line with historical performance of between 12% and 25% over the last 10 years

ROE

N/A: WTW has negative equity, after a couple transactions: a ~400M acquisition in 2005 and $1B stock repurchase in 2007 when the stock was trading for $45 vs. $30 now

ROA

LTM: 16%, declining year on year over the last 9 years from 30% to 16% now. (note: earnings have been declining for the past 4 years)

Revenue Growth

Revenue growth has historically been volatile between 5% and 15% year over year. WTW’s revenue declined for the first time in 2009 (-9%) and are barely recovering so far.

Cash distribution to shareholders

Dividend yield: 2.2% with a payout of 30%

WTW bought 20% of its stock in 2007, but other than that is not a regular buyer of its own stock.

WTW’s business performance seems to be OK, albeit not great. The company is exhibiting cyclicality in its margins and returns. In addition, the company seems to be facing headwinds with revenue declining for the first time in 2009 and now barely recovering.

In terms of looking out for shareholder returns, the 2.2% dividend is a positive but I am worried about management’s use of cash when I see them doing a $1B loan to buyback stock and losing 30% on that purchase. Management must have been frustrated in 2007 with the stock price and in order to get the price up (and their stock options) did something stupid.

2- Balance Sheet Risk (-)

Metric

Status

LT Debt / Equity

N/A given negative equity. However, debt can be considered high at 1.2Bn for a company with FCF of $240M

Current Ratio

0.4x! lower than historical levels wich have been declining every year from 1.2x in 2002 to 0.37 in 2009

High B/S risk with high debt and low current ratio driven in part by a high level of short term debt, which could be a problem in case of a market disruption or doubts about WTW’s creditworthiness.

3- Valuation Risk (=)

Metric

Status

Cash Return

6.5%

P/E

14.0x, in line with the S&P’s 13.7x and lower that WTW’s 5-year average of 19x

Valuation metrics point to a stock that is not expensive but not cheap either.

Conclusion

I will pass on WTW: the company seems to be facing some business challenges and I am worried about a management that seems to be ready to do anything to get the share price up (including leverage up the company for no real reason). As a result the company has a high level of debt which creates additional risk. Despite all these issues, the company’s price is not attractive and certainly does not leave any margin of safety to compensate for all the risks an investor would take.

Disclosure: No position

Source: Weight Watchers: Why I'm Going to Pass