Should I Buy Weight Watchers? 3 Pros, 3 Cons

by Tom Taulli | July 2, 2012 9:43 am

On news of the Supreme Court’s upholding of Obamacare, the shares of Weight Watchers (NYSE:WTW[1]) got a nice lift — up close to 5% during the past couple days. The legislation probably will spur corporations to find ways to cut costs, and a key to doing so will be improving employee wellness.

The news is welcome for Weight Watchers, which has experienced a lean 2012, with shares down about 6% so far — meaning it might be a bargain at current levels.

So should you buy Weight Watchers right now? To decide, let’s take a look at the pros and cons:

Pros

Great Brand: Founded about 50 years ago, Weight Watchers has become one of the most recognizable brands for the dieting industry. Besides its aggressive advertising, the company also has a network of company-owned and franchise locations. Last year, Weight Watchers generated about $1.8 billion in revenues, with net income of $305 million.

Secular Trends: About half of health care costs are attributed to dietary reasons. Thus, if Corporate America wants to reduce health care costs, it will need to get proactive with its employees. And Weight Watchers has a thriving business that caters to corporate clients.

Also, the opportunity is more than just about the U.S. market. By 2015, the number of overweight and obese people in the world is expected to reach a staggering 3 billion.

Internet Business: This has been getting lots of traction. In the latest quarter, the revenues in the segment saw a 38.7% growth rate. Weight Watchers offers two subscription services, which have been available since 2001.The company even offers apps for both the Apple (NASDAQ:AAPL[2]) iPhone and Google‘s (NASDAQ:GOOG[3]) Android operating system.

Cons

Competition: It’s brutal. In addition to other weight management offerings such as NutriSystem (NASDAQ:NTRI[4]), the business also is susceptible to occasional fad diets. For example, from 2003 to 2004, Weight Watchers saw a slowdown in business because of a surge in popularity of low-carbohydrate diets.

Europe: Weight Watchers has a strong business here. However, like most companies with business in Europe, revenues have come under pressure as of late. This could remain a drag for a couple years.

Medical Innovations: Pharmaceuticals for dieting has seen little progress during the past decade, but this is starting to change. Look at Arena Pharmaceuticals (NASDAQ:ARNA[5]), which just received FDA clearance for lorcaserin, an obesity-treating pill. So, better medical treatments certainly could represent a big threat to Weight Watchers.

Verdict

With its strong brand and proven approach to dieting, Weight Watchers is positioned nicely to benefit from the mega trends in its industry. Actually, the brand is so powerful that the company has licensed it to restaurants, which have made it as part of their advertising and menus.

What’s more, Weight Watchers is trading at a reasonable valuation, with a price-to-earnings ratio of only 13. It even offers a modest dividend of 1.4%.

So should you buy Weight Watchers stock? Yes — for now, the pros outweigh the cons.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO[6].  Follow him on Twitter at @ttaulli[7] or reach him via email[8]. As of this writing, he did not own a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2012/07/should-i-buy-weight-watchers-wtw-3-pros-3-cons/

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