The 52-week low list is a great place to find out-of-favor stocks, but rarely do you find a great brand name trading alongside other deep value stocks. Weight Watchers International, Inc. (NYSE:WTW) recently cruised to a new 52-week low amid a poor short-term outlook. This is despite having arguably the most trusted brand name in the weight management industry in addition to an enormous network of members and leaders. Investors who take advantage of this buying opportunity will be handsomely rewarded when the market recognizes the company’s superior competitive position.
The key to Weight Watchers International, Inc. (NYSE:WTW)’s success is its vast network of members and group leaders that meet to support each other in achieving weight loss goals. Over the decades, the company has built a trusted brand in an industry full of gimmicky products and programs. The brand is so trusted that restaurants and food producers are willing to pay the company to use Weight Watchers ratings on their menu items.
There are other programs, like NutriSystem Inc. (NASDAQ:NTRI), that have successfully rolled out comprehensive diet plans. Instead of rating other manufacturers’ food, NutriSystem makes all of the food included in its diet. This allows the company to capture more of its members’ spending, but the program lacks the support group element that makes Weight Watchers so successful.
In fact, the real value of the Weight Watchers program isn’t the diet per se, but the support that enables members to stick with the program long enough to get results. NutriSystem lacks this key element, which is why it has not been nearly as successful.
While NutriSystem competes with Weight Watchers on the diet front, Life Time Fitness, Inc. (NYSE:LTM) competes on the exercise front. Life Time Fitness is one of the largest fitness club operators in the U.S. While it does not offer a comprehensive diet plan, many consumers see gyms as a partial substitute for diet programs like Weight Watchers. Life Time faces tremendous competition due to the low barriers to entry in the industry. In addition, most gym members cancel memberships after only a few months — a problem that can be resolved by a support group.
So, while NutriSystem and Life Time Fitness both provide a means to lose weight, neither can offer members the support-group aspect that makes Weight Watchers International, Inc. (NYSE:WTW) so successful. Therefore, members are better served by joining Weight Watchers.
Superior Product, Superior Profit
Weight Watcher’s superior value proposition allows it to earn high and steady profits. The company has a much higher operating margin than Life Time and NutriSystem. In addition, the company’s strong brand name and comprehensive support network allows it to earn steady and predictable margins, even during a recession.
More importantly, Weight Watchers produces a lot of free cash flow. For every dollar in sales, Weight Watchers earns about $0.20 in free cash flow.
Over the last decade, Weight Watchers International, Inc. (NYSE:WTW) averaged a 19.52% free cash flow margin. If it continues to earn this margin on average, then it will produce $357 million in free cash flow each year assuming revenues do not grow. This implies a free cash flow yield of 15.64%.
However, Weight Watchers has grown sales at a compound annual rate of 7.6% since 2003. If it can grow sales at just 4.5% each year and keep the same free cash flow margin, investors should expect an annual return in excess of 20% (including dividends).
Weight Watchers may not retain the same free cash flow margin and it may not grow sales at 4.5% per year. But it has a lot of room to fall short of those assumptions before the stock underperforms the market. Therefore, investors should strongly consider an investment in Weight Watchers.
The article 52-Week Low Presents Buying Opportunity for This Name Brand originally appeared on Fool.com and is written by Ted Cooper
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