Maybe everything Oprah touches does actually turn into gold. Two years ago, the TV personality took a 10% stake in Weight Watchers International, Inc. (NYSE:WTW) when WTW stock was trading for less than $7 a share.
Oprah is now 40 pounds lighter and WTW stock is trading at $52/share and is soaring (again) today after the company reported a clean beat-and-raise quarter (again).
Forget the hyper-growth tech stocks Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX), and Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL). WTW’s near-7.5 times gain over the past 2 years puts all those stocks to shame.
Have you missed the rally? Some of it, yes, but not all of it. I think WTW stock is one to own for the next several years. Its a growth stock in a secular growth market that continues to trade at a reasonable valuation. That makes it a necessary addition to your portfolio.
The Weight Watchers Turnaround
What is behind the big run in WTW stock?
A few things. Firstly, WTW has finally figured out that they are on the right side of a huge, global secular trend that supports adoption of healthy eating and weight loss.
The healthy eating trend is nothing new in the United States. Millennials are especially concerned about what they eat, and are going to great lengths to eat right. This is why Amazon.com, Inc. (NASDAQ:AMZN) bought Whole Foods Market, Inc. (NASDAQ:WFM) and not Kroger Co (NYSE:KR). It’s why McDonald’s Corporation (NYSE:MCD) had to do an entire re-branding of their menu to stay relevant.
WTW is figuring out that this healthy eating trend is also a global thing. The company has been experiencing strong growth not only in the US, but also Continental Europe and the United Kingdom.
The weight loss trend, meanwhile, is somewhat new. Weight loss has always been a “thing,” but now it’s becoming more public and group-oriented than ever. Entertainment icons like Oprah and This Is Us star Chrissy Metz have transformed the private, shameful feelings of weight-loss into public, hopeful feelings. Undoubtedly, this creates a positive business tailwind for WTW.
Secondly, WTW is starting to leverage technology to deliver unique, healthy-eating and lifestyle solutions. I wouldn’t go so far as to say WTW is an Internet of Things (IoT) growth story, but its similar. The company is pioneering a “smart diet” space. Think tracking what you eat on your phone and connecting that data to data generated from your wearable device to get a robust health and wellness dataset.
By going global and focusing on technology, WTW has managed to turn its entire business around. Growth prospects look promising into the future, and those growth prospects are being undervalued by the market.
Why WTW Stock Can Head Higher
WTW just raised its full-year earnings guide to $1.80 per share.
That means WTW stock is trading 29 times 2017 earnings. That is too low of a multiple for this growth narrative.
Given the aforementioned secular trends, double-digit revenue growth is here to stay. Call it 10%. Gross margins are exploding higher (+320 basis points last quarter) and that trend should continue as the revenue mix grows more favorable. Operating expenses aren’t going up by much, so the Opex rate is dropping by quite a bit. All in all, 10% annualized revenue growth plus healthy margin expansion should lead to something like 20% annualized earnings growth.
A 29 times multiple for 20% earnings growth is a price-to-earnings/growth (PEG) ratio of just 1.5, versus a market-wide PEG ratio of 1.8 (19.7 times 2017 earnings for 10.7% growth). If you give WTW stock that 1.8 PEG ratio, you get to a $65 stock.
Bottom Line on WTW Stock
This turnaround around story still has room to run. By going global and focusing on technology, WTW has gone from a domestic weight-loss program to a global healthy lifestyle solution that can leverage big data to grow its business even more.
The growth prospects of this turnaround continue to be undervalued by the market.
WTW stock easily has another 25% upside over the next several months.
As of this writing, Luke Lango was WTW, AMZN, and MCD.