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Get Four
|  | NOVEMBER 30, 2004
 FOCUS STOCK By Howard Choe Weight Watchers' Attractive Figures [Page 2 of 2] MARGINS DOWN, MARGINS UP. In addition to the new program, we believe there are several other drivers for the company over the next 12 months such as continued growth in international markets and licensing opportunities. Weight Watchers stock should also get support from the company's active share repurchase program. We expect sales to climb approximately 4% in 2004, reflecting healthy international attendance growth, but declining attendance in Weight Watchers' North American operations. We expect sales to rise 7% in 2005, due to the new Core Plan program and products. We see margin deterioration in 2004, largely due to higher marketing expenses associated with sales territories acquired from franchisees and higher legal, insurance, regulatory, and compliance costs. We expect margins to expand in 2005 due to improved leverage on higher sales. Interest expense should decline, and we project modest share repurchases. We see earnings per share for 2004 advancing to $1.66, from $1.59 (excluding unusual items) in 2003. For 2005, we estimate EPS of $1.86. We believe the quality of Weight Watchers' earnings is high relative to its peers. After a adjustments made to its GAAP-based net income from continuing operations, and before extraordinary items to conform to S&P Core Earnings methodology, 2003 net income per share of $1.59 would be reduced to $1.57, a differential of less than 2%. This compares favorably to the average 17% negative variance for the personal-care companies we follow. SIGNIFICANT DISCOUNT. For 2004, we project S&P Core Earnings of $1.64, also a less than 2% reduction from our operating EPS estimate of $1.66. The reduction for option-expense accounts for all of the difference between the two estimates, as Weight Watchers does not have a pension plan. We project 2005 S&P Core EPS of $1.83, again reflecting projected stock-option expense. Given our view of the potential for Weight Watchers to generate a high level of cash flow and operating margins, we believe the shares should trade at a premium to the S&P 500. Weight Watchers recently traded at a p-e-to-growth ratio of 1.6, about in line with the S&P 500. Its recent forward p-e of 21 is at a significant discount to its three-year average of 24. Our 12-month target price is $48, or 22 times our 2006 EPS estimate of $2.18. Our discounted cash-flow (DCF) model calculates an intrinsic value of about $48. Based on our DCF value and our target p-e of 22 for estimated 2006 EPS, we arrive at a 12-month target price of $48, approximately 20% above recent price levels. Risks to our recommendation and target price, in our view, include higher consumer acceptance of do-it-yourself diet programs, low acceptance of new Weight Watchers programs, and a slow recovery of the company's domestic operations.
 Choe is an analyst following consumer discretionary stocks for Standard & Poor's Equity Research Services All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc. Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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