Up 100%, Is Weight Watchers’ Stock Still Attractive At $24?

by Trefis Team
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Trefis
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Weight Watchers International
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Weight Watchers’ (NASDAQ: WW) stock has gained more than 100% since hitting a low of $10 on March, 18 while the S&P 500 has also rebounded 20% over the same time period. However, we believe that Weight Watchers’ stock is likely still oversold at the current price of $24 per share and it has a significant upside. Our belief stems from the fact that the company’s stock is still 38% lower than it was at the beginning of 2020 and a little over 39% lower than it was at the starting of 2019, a little over a year ago.  Moreover, Weight Watchers reported a robust performance in its Q1 2020 earnings, with the company’s revenues surging by 10% y-o-y with subscriber count crossing 5 million- the highest count ever. Our dashboard, ‘What Factors Drove -46.4% Change In Weight Watchers International Inc Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Some of the stock price decline over the last 2 years is justified by the roughly 32% fall seen in Weight Watchers’ income margin from 12.5% in 2017 to 8.5% in 2019. This decline was exacerbated by a 4.4% increase in share count witnessed over the same time period. Overall, Weight Watchers’ earnings per share basis plunged by nearly 30%, which led to a decline in the company’s stock price. Notably, though, the company’s revenues have seen a healthy 8.1% growth between 2017 and 2019.

Shrinking earnings figures have led to a sizable drop in Weight Watchers’ P/E multiple – from 17.4x at the end of 2017 to 13.3x now. This reflects a 23% decrease in P/E multiple from December 2017 to March 2020. However, we believe there is a potential upside for Weight Watchers’ multiple when compared to levels seen over recent years – P/E of 21x at the end of 2019, and 17x as recent as in late 2017.

How Is Coronavirus Impacting Weight Watchers’ Stock?

The outbreak of Coronavirus has rattled the stock market and the broader economy. The pandemic, coupled with a broader economic slowdown, has adversely impacted consumer spending in the wellness and fitness industry. As people stay home and avoid public places, the company’s studio (non-digital subscriber) business has taken a sharp hit. This was evident from the fact that the company saw a 5% decrease in the studio revenues while all other revenue streams witnessed year-over-year gains.  However, digital subscription revenues more than offset the decline in studio revenues. Digital revenues surged by more than 17% with digital subscriber count reaching an all-time high of 3.6 million. It is noteworthy that the effects of the outbreak were felt toward the end of the quarter and as a result, the company fell short of its target of mid-teens subscriber growth. Weight Watchers witnessed a sudden drop-off in member signups towards the latter end of the quarter and we expect this trend to persist.

Although Weight Watchers’ revenues are likely to witness a sharp decline in 2020, the company has taken some strong measures in cutting costs that could help the company preserve its profits. Moreover, Weight Watchers has a strong retention rate and a robust digital business which is likely to mitigate the impact on the company’s top line. If there are early signs of abatement of the crisis, the company’s stock could see a modest uptick. Going by historical trends, we believe that the company’s stock is currently oversold and offers potential upside returns.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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