Don’t Count Out Weight Watchers Yet
The market may be disappointed that the Oprah effect hasn’t had a more pronounced impact yet, but Morningstar’s R.J. Hottovy sees the firm on track to make gradual progress.
Although
The market may have been looking for a more pronounced "Oprah effect" in 2016, likely explaining today's pullback. However, full-year 2016 guidance (calling for low-single-digit revenue growth, 100 basis points of gross margin expansion to just over 50%, flat marketing and general and administrative costs as a percentage of sales, and adjusted EPS between $0.70 and $1.00) is consistent with our expectations for a more gradual recovery. This guidance strikes us as realistic when factoring in structural industry changes, including mobile apps and other technologies disrupting industrywide pricing power (the basis for our no-moat rating). The changes to our model to conform to management guidance will be insufficient to change our $14 fair value estimate, but we believe the market may be overly discounting Weight Watchers' chances for recovery, and the stock may be worth a look with a moderately wider margin of safety.
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