On Monday after the close, Weight Watchers (NYSE:WTW) reported its second-quarter earnings results. The company beat on top and bottom line estimates and had strong subscriber growth. Shares must have jumped, right? Not exactly. WTW stock plunged roughly 15% and has a number of investors scratching their heads.
Weight Watchers Earnings
Earnings of $1.01 per share came in 13 cents ahead of expectations, while sales of $410 million just topped estimates and grew 20% year-over-year. Those are good results, but so too were other metrics.
Subscribers grew 28% year-over-year (YoY) to 4.5 million, while gross margins surged from 55.3% to 59.7%. That was a tailwind for operating income, which jumped 33% YoY. Earnings ultimately jumped 50% YoY, from 2017’s second-quarter result of 67 cents per share.
There’s more.
Management’s prior full-year outlook was for earnings per share of $3.00 to $3.20, with a midpoint of $3.10. They now expect earnings per share of $3.10 to $3.25, with a midpoint of $3.175. Consensus expectations were calling for earnings per share of just $2.92.
Valuing WTW Stock
These were some pretty good results from the looks of it. So why are shares down? Some have said that given the beat on Q2 results, coupled with the boost in guidance, it suggests that most of the raise was based on the company’s most recent quarter. In other words, Q3 and Q4 will be good but not great. I don’t really agree with that takeaway as consensus estimates were still below WTW’s prior outlook.
Another argument was that the company’s subscriber count fell quarter-over-quarter. End-of-quarter subs stood at 4.5 million, a Q2 record. However, that was down from 4.6 million at the end of Q1. Should investors be worried? From CFO Nicholas Hotchkin:
“Our business is following normal seasonal patterns. I was thrilled the end-of-period subscribers stayed up so nicely, 4.5 million, a record for Q2, versus 4.6 million in Q1. So, no surprises versus where we expect it to be.”
Analysts expect sales to grow 19.4% this year and about 13% in 2019. On the earnings front, using the midpoint of management’s guidance, we’re talking about a 93% increase from 2017’s $1.64 in earnings per share. If analysts’ 2019 estimate of $3.81 per share is accurate — although it could be too conservative given this year’s estimate — we’re talking about another 20% growth next year.
At current prices, that leaves WTW stock trading at just under 24 times this year’s earnings. That’s a pretty reasonable valuation in all honesty.
Trading WTW Stock
Click to Enlarge
WTW stock knifed right through the 100-day moving average in its latest decline. That’s already below its 50-day and that’s not looking great for WTW. However, there could be support nearby.
The $75 level was previous resistance and in May it became support. With WTW stock trading near that level now, it may be a reasonable spot for interested bulls to take a shot on the long side.
If support fails, count on a decline to the $68 to $70 area, where possible trend-line support and the 200-day moving average come into play. Should support hold, first look for a rebound to the 100-day near $81. If WTW stock gets through that, then look for a possible retest of the 50-day up in the $90s.
While the price action has been disappointing, what’s worth pointing out is the analyst reactions. On Tuesday, a handful of analysts issued their view. The worst was a hold rating and $100 price target, still implying more than 31% upside from current levels. Most views were a buy rating and price targets between $110 and $120, implying more than 50% upside.
The most bullish note came from D.A. Davidson, where analysts slapped a buy rating and $143 price target on WTW stock, implying 88% upside.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
