Why Weight Watchers’ Stock Can Rally Some More Despite Its 80% Gain Since March

by Trefis Team
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Weight Watchers International
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Despite an 80% rise since the March 23 lows of this year, at the current price of $26 per share, we believe Weight Watchers’ stock (NASDAQ: WW) has more room to go. Weight Watchers stock has increased from $15 to $26 off the recent bottom compared to the S&P, which moved 42% over the same time period. Strong growth in the digital business, with digital subscribers reaching an all-time high in early June as well as gradual re-openings of studio locations, has led to the stock beating the overall market. However, the stock is down 41% from levels seen in early 2018, over two years ago. It is also well below the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the steady rise since the March 23 lows, we feel that the company’s stock still has potential as it will see an upswing in demand as the situation normalizes and its valuation implies it has further to go.

That said, some of the stock price decline over the last two years is justified given that the company’s earnings per share figure has shrunk nearly 30% due to a sharp reduction in margins. Notably, though, the company’s revenues have seen a healthy 8.1% growth between 2017 and 2019.

But Weight Watchers’ P/E multiple expanded from 17x at the end of 2017 to 21x by the end of 2019. While the company’s P/E has decreased to 15x, it seems to be undervalued when the current P/E is compared to levels seen in the past years – P/E of 21x at the end of 2019 and 17x as recent as late 2017. We believe the stock is likely to see a decent upside despite the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard, ‘What Factors Drove -41% Change In Weight Watchers Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

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 high-margin studio business has taken a 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 in Q1 2020 earnings (ending March). Moreover, the lockdown in most cities was imposed towards the end of March, and the effects of the outbreak will be evident in the company’s Q2 results.

However, the company’s digital business has remained robust, with digital revenues surging by more than 17% in Q1 earnings. Further, the company’s digital member signup trends have accelerated since mid-April, with digital subscribers reaching an all-time high of 3.8 million. Moreover, Weight Watchers has a strong retention rate, which is likely to mitigate the impact on the company’s top line. Despite a strong retention rate and a robust digital business, we expect Weight Watchers’ revenues to witness year-over-year declines in 2020 due to a steep fall in its studio business.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new COVID-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus, which set a floor on fear, the market has been willing to look through the current weak period and take a longer-term view. In light of this, Weight Watchers’ stock looks like a good bet in the near- to medium term.

While Weight Watchers is outperforming, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising

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