Weight Watchers International, Inc. (NYSE:WTW) has enjoyed a great twelve months, and Weight Watchers stock has more than quadrupled in that time. But growth catalysts have become murkier even as the company pursues new ventures. With the stock price increases it looks like most of the growth is already priced in.
Given the higher valuation, investors should probably pass on Weight Watchers stock at this time.
WTW stock reported strong earnings, raised guidance
In a recent article, I stated that Weight Watchers stock had “gotten too fat” and recommended staying away. The stock has seen outsized growth, especially over the last year, surpassing the growth rate of peers Medifast Inc (NYSE:MED) and Nutrisystem Inc. (NASDAQ:NTRI).
Much of that can be attributed to the “Oprah effect.” Oprah Winfrey’s role as spokesperson raised the profile of both the company and the stock.
In its February earnings report, Weight Watchers reported a 17% increase for 4Q 2017 and a 12% increase for all of 2017. Quarterly income of 37 cents per share beat estimates by six cents per share. The company reported full-year earnings of $2.40 per share, up from $1.03 per share in 2016. A 23% increase in subscribers drove the increased revenue and profits.
The company also increased guidance. They believe they’ll earn between $2.40 and $2.70 per share in 2018. Analysts had set the previous consensus estimate at $1.90 per share.
Weight Watchers Stock Faces Uncertainty
It is where the company goes from here that creates issues for WTW stock investors. Earlier this month, Oprah sold 2.36 million shares, around 25% of her stake. Moreover, DJ Khaled has now taken over more of the spokesperson duties. Whether Khaled will build on Oprah’s success and push the stock higher remains unclear.
Its latest venture involves offering meal kits, but meal kits have become a low-margin, no-moat business. The pre-eminent meal kit company, Blue Apron Holdings Inc (NYSE:APRN), has seen its stock lose more than 80% of its value since its IPO.
Low margins stemming from intense competition, which will also now come from WTW, have closed off options for APRN to turn a profit. Unlike APRN, I don’t think WTW will fall to $0. However, meal kits will likely not become much of a catalyst for profit growth either.
Analysts project 2018 consensus earnings of $2.57 per share and $3.43 per share for 2019. That indicates the high growth enjoyed in 2017 will only slow temporarily. Still, the company now trades at a price-to-earnings (PE) ratio of around 26.5.
That stands only slightly higher than the PE for the S&P 500. However, that places the PE for WTW stock well above long-term averages, which stand at around just over 16.5 times earnings.
I feel more optimistic about WTW’s growth prospects than I did before the earnings report. However, the stock price has moved well ahead of an admittedly impressive growth rate. Given its move ahead of historic averages, WTW stock could easily shed weight in the short term.
The Bottom Line on Weight Watchers Stock
WTW stock has enjoyed an impressive run. However, with the growth rate of the stock price, Weight Watchers is unlikely to fatten stock portfolios in the near term. To be sure, WTW became a beneficiary of the Oprah effect, which helped to more-than-double profits and more-than-quadruple the stock price.
However, with Oprah stepping back, the likelihood of Weight Watchers stock keeping its PE ratio at a historic high has also come down.
Weight Watchers has achieved a dramatic transformation for itself. However, with fewer obvious growth catalysts, investors should hold out for a PE that’s more in line with the stock’s long-term averages.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.