How much is Weight Watchers worth? I’ll do a simple discounted cash flow calculation to find out. Analysts are predicting anemic earnings growth for the next five years, and with 2012 seeing a decline and the interest expense set to rise I tend to agree. I’ll consider three different growth scenarios, and I’ll use a discount rate of both 12% and 15% to define a fair value range.
- Anemic growth – owner earnings grow by 3% annually in perpetuity.
- Slow growth – owner earnings grow by 6% annually for the next 10 years and by 3% annually after that.
- Fast growth – owner earnings grow by 9% annually for the next 10 years and by 3% annually after that.
Here are the fair value ranges for all three growth scenarios:
| Scenario | Low-end | High-end |
|---|---|---|
| Anemic | $0 | $17.46 |
| Slow | $11.77 | $31.35 |
| Fast | $23.33 | $48.65 |
In my previous article on Weight Watchers I set the growth rate to the average analyst estimate at the time, which was 10.3%. I stated that this number was most likely an overestimate, and now analysts have lowered that rate dramatically. Because of the massive amount of debt if Weight Watchers can’t manage any real growth going forward the stock is worth next to nothing. The Fast scenario is closest to the original article, and under this scenario the stock is fairly valued. So Weight Watchers needs to basically match its growth rates from the past to be fairly valued today. I don’t think this is likely to happen.
Are there any better options?
Weight Watchers is the best weight-loss company but not the best stock. No competitor matches Weight Watchers’ meeting infrastructure and advantages. NutriSystem Inc. (NASDAQ:NTRI) is a much smaller company with no debt, but the company isn’t all that attractive otherwise. Revenue has been declining since 2007, margins have fallen off a cliff, and 2012 saw net income turn negative. The first quarter of 2013 doesn’t look much better. The company does pay a nearly 6% dividend, but I suspect that this may be cut sometime soon.
Another alternative company is Herbalife Ltd. (NYSE:HLF). The company has some debt, about $250 million after accounting for the cash, but this pales in comparison to Weight Watchers International, Inc. (NYSE:WTW). The stock trades at a debt-adjusted 14 times owner earnings, quite a bit lower than Weight Watchers, and also offers a higher dividend yield. Revenue has been growing fast, with 2012 seeing an 18% increase, and it would appear that the stock is cheap based on its growth prospects. There is significant controversy surrounding the company, however, with hedge fund manager Bill Ackman shorting the stock and claiming that Herbalife is a pyramid scheme. So it may be best to stay away.
The bottom line
Weight Watchers International, Inc. (NYSE:WTW) is a good company weighed down by its massive debt. The company needs to see fast growth in order to justify its share price, but I think that growth going forward will be slow at best. Although I’ve seen plenty of articles recently claiming that Weight Watchers is cheap, the debt levels greatly skew traditional metrics. At $30 per share Weight Watchers would be worth another look, but the price right now is far too optimistic.
Timothy Green has no position in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $50 Calls on Herbalife Ltd. (NYSE:HLF).
The article Avoid This Debt-Laden Company originally appeared on Fool.com.
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