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Get Four
|  | NOVEMBER 17, 2003
By Eric Wahlgren The Skinny on Weight Watchers Popular low-carb diets have dented its stock, but stout fundamentals and a solid long-term outlook may make this a buying opportunity Weight Watchers International's (WTW ) stock has gone on a diet. Shares of the weight-loss services outfit slimmed to a yearly low of $36.10 on Nov. 4. Though the Woodbury (N.Y.) company's stock has rebounded to around $38, it's down 21% from its 52-week high of $48.37, hit on on December 9, 2002. Making investors nervous is the impact of low-carb diets such as the Atkins and South Beach regimes on Weight Watchers' business, which involves running some 44,000 weekly weight-loss meetings around the globe. The low-carb craze appeals to millions because the diets basically let people pig out, as long as they avoid sugary and starchy foods. SHRUNKEN ATTENDANCE. By contrast, Weight Watchers adherents can dig into just about whatever they want, carbs or otherwise. But portions are more limited because devotees must stay within a certain number of "points" -- determined by a food's calories, fat, and fiber content. The method isn't for couch potatoes as it encourages exercise: A workout allows dieters to swap points for food. Still, the Atkins fad has dented Weight Watchers' performance. In the third quarter ending Sept. 27, attendance at company-operated meetings in North America fell 2.4%, excluding acquisitions. "It has been more difficult for us to generate word-of-mouth interest in this environment of media hype around carbs and low-carb dieting," conceded Linda Huett, Weight Watchers president and chief executive, in a Nov. 5 conference call with investors. Despite the challenges, investing pros remain bullish on Weight Watchers, which logged $809.6 million in revenues in 2002. According to analysts, it has only begun to tap the $80 billion global dieting industry. "COMPELLING VALUATION." What's more, analysts say the low-carb movement appears to be peaking. A growing number of low-carb "refugees" are showing up in Weight Watchers meetings, complaining that they can't keep the weight off on the other diets, analysts say. "While low-carbohydrate diet popularity remains a pressure, its growth trajectory also appears to have stabilized," Andrew McQuilling, a UBS analyst in New York, wrote in a recent research note to investors. The recent decline in Weight Watchers' stock may actually represent a buying opportunity, according to McQuilling and other Wall Street pros. "We see valuation as compelling, given Weight Watchers' high-return business model and bright secular growth outlook," says McQuilling, who has raised his rating to buy from neutral and assigned a $45 target price, which represents a 25% appreciation potential in the next 12 months. (UBS has done banking with Weight Watchers.) A closer look at the third-quarter results suggests that the 42-year-old outfit, which went public two years ago, has solid fundamentals. For starters, analysts had been expecting a drop of more than 6% in North American attendance at company-operated meetings (excluding acquisitions), so the 2.4% dip came as something of a relief. Overall, North America grew 14% when the Weight Watchers franchises in its $181.5 million purchase of the WW Group earlier this year are included. International operations, which includes 30 countries, saw attendance increase 7%.
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