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Herbalife Ltd. (HLF), Medifast, Inc. (MED), Weight Watchers International, Inc. (WTW): Can These Marketers Get Your Portfolio in Shape?

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Herbalife Ltd. (HLF)The fundamentals in the weight management business have never been better, given the population’s need for some personal downsizing.  According to the U.S. Centers for Disease Control (CDC), seven out of ten adult Americans are overweight, with 80 million people falling into the obese category.  While the drug industry continues to search for a magic pill to counter the problem, the weight management industry sells better nutrition and lifestyle changes through their products.  So, which companies are worth a look?

Medifast

The Maryland-based weight loss company’s 5&1 Plan has been on a winning streak, with a 250.8% gain in sales over the past four fiscal years.  Medifast, Inc. (NYSE:MED)’s basic premise is for customers to eat five of its specially packaged meals each day, as well as one freshly prepared meal that has a good balance of protein and non-starchy vegetables.  The company sells the majority of its products through “health coaches,” with more than 10,800 of them as of September 2012.

In FY2012, Medifast reported a 19.6% increase in total sales, as it introduced new products and its independent sales force generated higher average sales.  However, the company’s operating income fell 9.7% due to the cost of its various expansion activities.  Despite a growing online segment, Medifast, Inc. (NYSE:MED) has been building a retail presence through a network of weight loss centers, in order to counter the retail outlets of its competitors.

With an estimated $61 billion in annual sales for the weight management industry, Medifast has significant growth opportunities if it can keep recruiting and motivating its independent sales force.  While the company has achieved growth in online and retail segments, its direct selling organization still accounts for the majority of its annual sales.  Acknowledging the importance of health coaches to its overall success, Medifast has been upgrading training tools and providing compensation structures that should keep its sales force going strong.  As long as its products continue generating results, Medifast should deliver for investors.

Weight Watchers International

The New York-based company is the world’s largest weight management specialist, with 50 million members and 45,000 meetings each week.  Unlike most weight loss companies, though, Weight Watchers International, Inc. (NYSE:WTW) is primarily a service organization that provides information, tools, and advice through its weekly meetings.  Its PointsPlus system creates point values based on a meal’s protein, carbohydrate, fat, and fiber content, which are then used by customers to make intelligent eating choices.

In FY2012, Weight Watchers had a fairly rough year, with flat revenue growth and a 9.2% decrease in adjusted operating income.  While total paid weeks of the company’s programs grew by 9% due to growth in the online segment, the average weekly attendance at its live meetings fell by over 6 million customers.  In addition, Weight Watchers reported revenue declines in its products division, which sells a variety of licensed products including baked goods, cookbooks, and restaurant guides.

Weight Watchers International, Inc. (NYSE:WTW)’s previous recapitalization leveraged its balance sheet, with $2.3 billion of funded debt as of December 2012.  Despite a reasonable P/E multiple around 10, the company is much more expensive when factoring in its debt load, which probably accounts for its poor stock price performance over the past year. Weight Watchers has significant work ahead to reinvigorate growth and improve its financial position.

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