After a really good 2017, Weight Watchers International, Inc. (NYSE:WTW) stock is off to yet another hot start in 2018. Some good news had WTW stock trading 7% higher in the first trading day of 2018.
The healthy lifestyle company is ringing in the new year with a new celebrity endorsement. Weight Watchers has enlisted widely followed music producer DJ Khaled as a social media ambassador for the WTW brand.
Does a 7% move higher because of a celebrity endorsement make sense for WTW stock?
Absolutely. This is the same company that has made a killing off of TV personality Oprah Winfrey’s celebrity endorsement over the past two years. Since Oprah publicly endorsed Weight Watchers and took a 10% stake in the company back in late 2015, Weight Watchers stock has grown by nearly seven-fold from $7 to $47.
Granted, DJ Khaled is no Oprah Winfrey. His endorsement won’t catalyze another seven-fold increase in WTW stock price over the next two years.
But Weight Watchers is a brand driven by celebrity endorsement. And DJ Khaled taps into an entirely different demographic from Oprah.
All in all, DJ Khaled’s endorsement of Weight Watchers is big news. It is yet another reason to buy and hold WTW stock for the long term.
I have been bullish on WTW stock for a while now, calling it a reasonably valued name in a secular growth market.
Consumers are now more concerned with what they eat than ever before. They are also more willing to try weight-loss programs than ever before, as celebrity endorsement of weight-loss regimes has transformed the private, shameful feelings of weight-loss into public, hopeful feelings.
This combination implies accelerated adoption of programs like the ones offered by WTW.
Accelerated program adoption means that double-digit revenue growth is here to stay for WTW. Revenues rose 14% last quarter. I think that slows to 10% over the next several years.
Meanwhile, gross margins are exploding higher (+320 basis points last quarter) and that trend should continue as the revenue mix grows more favorable. Healthy sales growth will drive healthy operating expense leverage.
All in all, double-digit revenue growth plus strong gross margin expansion and healthy expense leverage means that WTW is a potential 20% earnings growth story.
But Weight Watchers stock is trading at just 28x this year’s earnings estimate for that 20% growth. That is a mere 40% growth premium. The S&P 500 is trading at a 90% growth premium (20.4x this year’s earnings for 10.7% earnings growth prospects).
Overall, then, it’s easy to see why I’ve been bullish on Weight Watchers stock. It is a big growth stock trading at a huge discount to the market.
Today, I’m doubling down on my bull thesis because the DJ Khaled endorsement significantly increases the likelihood that WTW grows earnings at a 20% clip over the next several years.
Firstly, it can’t be stated enough that WTW is an endorsement driven brand. Weight loss programs are tough to trust, and even tougher to try if you’re ashamed about your weight. But a celebrity endorsement adds trust while eliminating shame.
That is why Oprah’s endorsement sent Weight Watchers stock from $7 to $47. DJ Khaled’s endorsement will also have a hugely positive impact on WTW stock price.
Secondly, DJ Khaled is a widely followed music producer. His Instagram has 8.9 million followers, his Twitter Inc (NYSE:TWTR) account has 3.9 million followers, and his Facebook Inc (NASDAQ:FB) page has 3.4 million followers. He gets 3 to 4 million views per snap on Snap Inc (NYSE:SNAP).
Those are big numbers for WTW, which had just 3.4 million subs last quarter. DJ Khaled promoting Weight Watchers through his 3 to 9 million followers on various social media accounts could translate into huge growth for WTW’s 3.4 million sub base.
Thirdly, DJ Khaled taps into an entirely different audience for WTW than Oprah. DJ Khaled is a hip hop icon whose followers don’t overlap much with Oprah’s followers. Consequently, DJ Khaled’s endorsement will very likely translate into huge sub growth.
It is a big growth stock trading at a big discount that just received a big catalyst.
That is a near perfect combination that should lead to Weight Watchers stock heading materially higher over the next several months.
As of this writing, Luke Lango was long WTW and FB.