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WTW Is A Screaming Table Pounding Buy

Summary

Analysts have panicked needlessly.

Longer-term outlook still very strong.

Slide in subscribers is seasonal and normal.

I write this piece as a 29-year independent analyst of the weight loss market since 1989. I m the Research Director at Marketdata LLC, which has published 50+ in-depth market research studies about all segments of the U.S. weight loss market.

And yes, I own WTW stock and plan on buying more at the current prices. So, I'm putting my money where my mouth is.

WTW stock got hammered last Thursday, after the company reported better than expected earnings but saw the number of subscribers fall and sales came in slightly under expectations.

But, stock analysts, hedge funds and institutions still don't get it. In the U.S. weight loss market, It's NORMAL for business to be slower in the Summer months (Q3). It's the historical industry sales pattern. Just like health club memberships, after making New Years resolutions to lose weight and get in better shape, the 1st quarter of the year is when the sign-ups soar. As people grow weary of dieting or working out after a few months, people drop ,out of plans, and if they haven't reached their goal weight by Memorial Day, they tend to quit and take a break for a few months, returning somewhat in the Fall.

A 7% decline in subscribers from 4.5 million in Q1 to 4.2 million by Q3 is well within the normal range.

As reported by the CFO: "End-of-period subscribers to 4.2 million, up 800,000 subscribers or 25% from prior year driven by strong digital performance and supported by a great start to our Invite a Friend initiative. -- THIS IS GOOD NEWS. Similar to what we saw in the first half in the U.S., more than 40% of our member sign-ups in Q3 were new to WW." 

The CFO explained that..."Historically, approximately 40% of our annual member recruitments have occurred during Q1. Therefore, each year, Q1 is our peak for end-of-period subscribers, and each year-end is our low point. To illustrate, we went from 3.2 million at the end of 2017 to a record 4.6 million at the end of Q1, then move to 4.5 million and 4.2 million at the ends of Q2 and Q3, respectively, and we expect to end 2018 with up to 4 million subscribers. A 12% decline from the Q1 end level, but a 25% increase in level year-over-year."

New Partnerships

The company has entered new partnerships with Headspace (meditation app), ClassPass (yoga and fitness studios classes), Aaptiv, and Blue Apron (meal kits). -- THIS IS GOOD NEWS -- The company is finally taking some action (as Marketdata has long recommended) to form partnerships with other retailers, to broaden its scope to attract new members.

Marketdata has analyzed the markets for Meditation, Meal Kits, and Self-improvement, and Digital Wellness, and these are all high-growth markets. Mindy Grossman is much more receptive than her predecessor to forming partnerships with these players that complement weight loss. This will broaden their base of customers and keep them in the fold longer. All good stuff.

"WW is actively pursuing partnerships to help them reimagine third-party locations with the possibility of hosting WW workshops in other third-party properties, such as retailers, workspaces or hospitality partners... "that can offer a better member experience and our stronger representation of our brand and allow us another avenue for customer acquisition. In Canada, WW has a partnership with the retail chain, Loblaws, where it hosts WW workshops in the test kitchens of more than 60 locations."

"WW recently acquired Kurbo, a family-based healthy lifestyle coaching program derived from Stanford University's pediatric weight control program. At this time, Kurbo will continue to service members as a standalone offering."

"Average retention continues to be well over 9 months in both Digital and Digital + Studio."

"Gross margin rate was 59%, up 420 basis points year-over-year on constant currency."

"WW is further enhancing its fitness content through a new partnership with Aaptiv , a leading provider of premium digital health and wellness content. Aaptiv is developing a selection of exclusive audio base fitness classes to WW members. Later in November, this content will be integrated into the WW app for U.S. members."

In addition, "We previously discussed an initial pilot we did this summer with Headspace, a global in meditation and mindfulness. Following this successful pilot, we formed a broader partnership and we will be embedding Headspace content in our app exclusive content."

"Our WW Fresh quick-prep pre-portioned meal kits are now being piloted and we look forward to a broader rollout beginning later this quarter and expanding in 2019."

"WW is partnering with Blue Apron to introduce WW Freestyle-inspired dishes to Blue Apron menus beginning in January 2019."

The company is basically hitting on all cylinders while setting the foundation for future growth. It's just that Wall Street analysts are so short-term oriented, focused on THIS quarter, that they can't see the longer term potential. Typical. So, they bash the stock, sending it down 20%.

This is not panic time guys. The company is posting strong results, still growing in double-digits, making partnerships in hot growth wellness and self-improvement market segments, beefing up its digital offerings, with no erosion of profitability--all within a strong economy. It's still the leader in the weight loss market, with more assets and a global footprint larger than anyone. So, what's the problem analysts? Must a company be PERFECT for you not to bash them?

This is a huge opportunity. At less than $50 per share, WTW is a screaming long-term buy in my opinion, with a realistic upside of 100%.

Disclosure: I am/we are long WTW.