Weight Watchers International, Inc. (NYSE:WTW) has enjoyed an impressive run. After years of revenue and earnings declines, a celebrity endorsement and investment stake by Oprah Winfrey turned the company around. Now Weight Watchers stock has nearly returned to all-time highs.
However, the recent run-up has taken WTW to historic highs regarding its price-to-earnings (PE) ratio. Given the sizeable upward move, I believe the time has come to shed Weight Watchers stock from investor diets.
To be sure, Oprah’s celebrity endorsement put Weight Watchers back on the map. The United States struggles with its “most obese nation in the world” depiction. As such, American consumers meet diet products with both skepticism and fascination. Having Oprah both endorse and lose weight on Weight Watchers products adds credibility.
And with Oprah’s involvement, the value of WTW stock has grown fatter. The company faced years of decline and had sometimes traded below $5 per share before Oprah became its spokesperson and investor in October 2015.
Oprah’s impact took time to affect the Weight Watchers stock price. However, in 2017, the stock price started moving from the $11 per share range to as high as $76 per share.
Income gains have backed up this stock price increase. Revenues, which had once been declining at over 8% per year, now grow by about 10% per annum. Earnings per share (EPS) rose by 55% in 2017. Analysts expect slow EPS growth in 2018 before it returns to the double digits in 2019.
WTW reports earnings on Feb. 27 after the bell. The company will report both fourth quarter 2017 and full-year earnings at this time. WTW stock has beat earnings in the last few quarters, so Wall Street will likely expect this again. However, investors should look more to guidance as to whether the stock is poised for future growth or merely whether Weight Watchers has become fat.
Although a seven-fold increase is an impressive run, building on that further will bring unprecedented challenges. The stock traded at a PE below 10 as late as 2015. Today, that PE stands at 44. Other S&P 500 stocks currently see PE ratios much higher. However, with EPS growth slowing to around 10%, investors may balk at bidding the stock price higher.
Beginning in 2018, DJ Khaled took over the celebrity spokesperson duties. While Khaled has a large following, succeeding Oprah will prove to be a challenging task.
Oprah took the company from the bottom to the success Weight Watchers has become today. However, compared to Oprah, Khaled has a niche following. Taking Oprah’s baton and running faster with it will prove to be a challenge.
One strategy that could mitigate the overvaluation is bringing back the dividend. The company suspended the Weight Watchers stock dividend in 2013 amid declining profits. Both NutriSystem and Medifast stocks pay dividends as well, so WTW stock may need to resume payouts to compete.
Weight Watchers stock has enjoyed a large upward move. Unfortunately, this move has made WTW stock too fat for investors looking for high returns. After years of decline, Weight Watchers stock has returned to prominence. Today, Wall Street understands this and has bid the stock price up to high valuations.
Moreover, whether the company’s new spokesperson can match Oprah’s success remains unclear. While a return of the dividend could help attract buyers, valuations appear ahead of company earnings. Much like a Weight Watchers meal may trim one’s waistline, buying Weight Watchers stock now will likely thin one’s stock portfolio.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.