4 Stocks That Will Benefit From the Weight Crisis

WTW - 4 Stocks That Will Benefit From the Weight Crisis

Source: The Italian Voice via Flickr

Unfortunately, America’s obesity epidemic continues to deteriorate, as more and more children and adults are becoming obese. Meanwhile, more information is emerging about the dangers of obesity.

In addition to heart disease and diabetes, scientists increasingly agree that obese people are more likely to get cancer, which in many cases spells a death sentence. Against this background, it’s worth looking at several companies and stocks that are likely to benefit by helping people combat this worsening trend.

Weight Watchers International (NYSE:WTW), Nutrisystem (NASDAQ:NTRI), United Natural Foods (NASDAQ:UNFI) and Sprouts Farmers Market (NASDAQ:SFM) all fit the bill.

Stocks to Buy: Weight Watchers (WTW)

Stocks to Buy: Weight Watchers (WTW)
Source: Shutterstock

Weight Watchers stock has rallied tremendously in the last few years. However, trading at a forward price to earnings ratio of 27, WTW stock is still priced at a reasonably level.

The company reported significantly better than expected first-quarter results, citing strong recruitment trends. Its membership reached a record 4.6 million, and its total paid weeks jumped 27% year-over-year last quarter. Furthermore, the company predicted that its overall revenue would surge almost 20% in fiscal 2018.

A number of analysts were very enthusiastic about the outlook for Weight Watchers in the wake of the results.

For example, SunTrust analyst Michael Swartz started coverage of WTW stock with a $90 price target and a “buy” rating on May 15. According to the analyst, who was upbeat about the company’s strategy, Weight Watcher’s products are “one of the first stops” for someone considering a structured weight loss program, The Fly reported.

Also starting Weight Watchers stock with a “buy” rating was Bank of America’s Olivia Tong. The analyst, who placed a $95 price target on Weight Watchers stock, wrote that the company “has a proven operational model and sustainable momentum,” The Fly noted.

Finally, Craig-Hallum’s Alex Fuhrman expects the company’s summer ads to cause its recruiting trends to accelerate, The Fly noted. He kept a $120 price target and a “buy” rating on Weight Watchers stock.

WTW has excelled at recruiting well-known, highly respected celebrities to endorse its products. Of course, the company has convinced Oprah Winfrey to invest in Weight Watchers stock and tout its products in ads. More recently, the company signed up music producer DJ Khaled and actor Kevin Smith in an effort to appeal to more young people and males.

Judging by Weight Watcher’s first-quarter results, that effort seems to be bearing fruit.

Stocks to Buy: NutriSystem (NTRI)

Stocks to Buy: NutriSystem (NTRI)
Source: Nutrisystem

Like Weight Watchers, NutriSystem reported stronger-than-expected results. NutriSystem also raised its fiscal 2018 earnings per share guidance to $2.04-$2.14 from $1.99-$2.09 and increased its full-year top-line outlook to $693 million-$708 million from its previous guidance of $685 million-$705 million.

NutriSystem has rallied around 30% since it reported its results, but NTRI stock is still trading at a low forward price-to-earnings ratio of around 16.

NutriSystem appears to be developing innovative new marketing segmentation strategies and potent new products. For example, the company has launched ads targeting diabetes patients and later this year, responding to demand it identified among its customer base, will begin targeting vitamin users with a new line of vitamin pack products.

Additionally, NutriSystem says that the engagement with its app is rising and it has identified proven marketing techniques of recapturing former customers who have left the program. Finally, the company recently added 19 new items to its menu, suggesting that it is focused on incorporating additional, innovative, popular foods to its offerings.

In my experience, companies that innovate frequently and significantly are much more likely to succeed than those that largely stay with the status quo. Judging by Nutrisystem’s results, the company’s significant, frequent changes on the product and marketing fronts appear to be working. These effective adaptations make NutriSystem stock very attractive.

Finally, the revenue generated by NutriSystem’s South Beach line jumped 150% year-over-year in the first quarter, suggesting that the line’s popularity is rapidly increasing.

Stocks to Buy: Sprouts Farmers Market (SFM)

Source: Shutterstock

Sprouts specializes in selling natural, organic food and other healthy, specialized food products i.e. vegan and gluten-free offerings, at lower price points than Amazon’s (NASDAQ:AMZN) Whole Foods supermarket. Sprout’s revenue has grown significantly in recent years, and it definitely has many enthusiastic admirers. Moreover, as more people increase their focus on eating healthier food and losing weight, Sprouts’ growth should accelerate going forward.

Despite worries that price cuts at Whole Foods would make its offerings cheaper than those of Sprouts, the latter company’s products are still significantly less costly.

Sprouts is profitable, as it reported first quarter earnings per share of 50 cents for the first quarter and reaffirmed its fiscal 2018 EPS guidance of $1.22-$1.28. The company’s comparable sales growth came in at 2.7%, and its two year comp growth was 3.8%, suggesting that its comp sales accelerated in the first quarter of 2018 versus the first quarter of 2017.

Meanwhile, rising food costs tend to increase supermarket chains’ profits. There are indications that food inflation is accelerating. According to the USDA, at-home food costs had risen 0.4% in the first five months of 2018,versus a decline of 1.3% in all of 2016 and a loss of 0.2% in all of 2017. Meat prices rose 1.4% in May 2018 versus a 0.6% decline in all of 2017, while egg costs jumped 21.6% in May versus a 9.5% decline in all of 2017. The cost of fruits and vegetables had risen an average of 0.7% in the first five months of 2018 versus a 0.2% decline in 2017.

Importantly, the inflation of food away from home came in at 2.7% in May, up from 2.3% in all of 2017. As restaurant food becomes more expensive, people will choose to get more of their food from supermarkets and eat at home.

However it should be noted that the average increase in away from home food prices for the first five months of the year came in at 1.9%. Still, May’s jump may indicate that eating out is starting to become more expensive.

Finally, a larger supermarket chain or a slow growth food company could easily decide to buy Sprouts, as the market cap of Sprouts stock is still just around $3 billion.

Stocks to Buy: United Natural Foods (UNFI)

Stocks to Buy: United Natural Foods (UNFI)
Source: Shutterstock

United Natural Foods sells organic, natural and specialty foods to groceries in the U.S. Of course, the company, which sells a significant amount of products to Whole Foods, will benefit if that chain becomes much more popular.

Like Sprouts, United Natural Foods should be boosted by food inflation and by increased demand for healthier food. It’s looking to further exploit the latter trend by increasing its exposure to fresh food and growing its e-commerce business, the company said on its fiscal third quarter results conference call on June 6.

Importantly, United Natural Foods also reported that it’s outpacing the growth of the organic foods sector. Indeed, the company’s net sales jumped 12% year-over-year in the third quarter, while its net operating income soared 42% versus the same period a year earlier.

Despite the impressive growth, United Natural Foods stock has an anemic valuation. United Natural Foods stock is trading at a forward price-to-earnings ratio of just 12, and its price-to-sales ratio is a tiny 0.22.

After the company reported its third-quarter results, multiple analysts complained about its margins. Last quarter, its gross margin came in at 15.4%.

I believe that, going forward, a combination of higher food inflation, supply chain improvements, and greater scale will meaningfully boost United Natural’s margins. Meanwhile, as Wall Street becomes much more enthusiastic about the organic food category, the multiples of UNFI stock should rise significantly.

As of this writing, Larry Ramer did not own shares of any of the companies mentioned. 

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Article printed from InvestorPlace Media, https://investorplace.com/2018/07/4-stocks-that-will-benefit-from-the-weight-crisis/.

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