WEIGHT WATCHERS INTL INC WTW
November 10, 2015 - 8:25am EST by
piggybanker
2015 2016
Price: 23.50 EPS 0 0
Shares Out. (in M): 67 P/E 0 0
Market Cap (in $M): 1,600 P/FCF 0 0
Net Debt (in $M): 1,900 EBIT 0 0
TEV ($): 3,500 TEV/EBIT 0 0

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Description

We believe that WTW stock has the potential to more than triple from current levels, as the recent partnership with Oprah Winfrey and the company’s upcoming new product launch will drive meaningful subscriber growth, which should dramatically increase profitability and continue to re-rate the stock upward.

 

Background

·         WTW has been written up on VIC four times in the past four years. (twice as a long, and twice as a short). There is a lot of background information in these write-ups/comment threads and we urge anyone interested to read for further context.

·         Given the plethora of background information available to VIC readers, we will begin our write-up with details on the partnership WTW announced with Oprah Winfrey on 10-19-15.

·         To summarize, Ms Winfrey invested over $43mm of her own personal capital to purchase ~6.4mm shares of WTW common stock. Ms Winfrey was also granted options to purchase an additional ~3.5mm shares at a strike price of ~$7.00.

·         The equity investment equates to a 10% stake in WTW common stock, or ~15% including the value of the options (which are now well in the money)

·         In addition to being a large shareholder, Ms Winfrey has joined the Board of WTW, and will be part of the upcoming winter season marketing effort (ie endorse the product)

 

Benefits of Winfrey Partnership

·         We believe that Ms Winfrey’s partnership with WTW will have a tremendous positive impact on the franchise.

·         Ms Winfreys popularity is indisputable

o    ~48mm people watch Oprah’s television show every week. Importantly, her audience is predominately female, white and over the age of 55, which we believe aligns well w/ the WTW core subscriber.

o    Additionally, Ms Winfrey has 2.4mm magazine subscribers, over 6 million users per month visit her website. She also has over 29mm Twitter followers.

·         Ms Winfrey has been successfully using the WTW product since August, and sharing her experience to a national audience

o    Days after the WTW investment, Oprah appeared on the Ellen DeGeneres show, where she stated “As of today, since August 12th, I’ve lost 15 pounds”, and “I’m excited about Weight Watchers being able to bring a healthier, more holistic approach for everybody”

·         The partnership is already bearing fruit for WTW, as the company commented on its recent call “The response to this partnership announcement has been terrific. The general press has taken a great interest in the news, and we have seen significant improvement in visitors to our website, which has translated into a strong response in the business…”

·         We believe that Ms Winfrey will have continued success with the WTW program, and that WTW should see a growing impact on its business, as the public will experience in real-time the impact the program has on Ms Winfrey, and will be empowered to participate themselves.

·         Ms Winfrey is highly incentivized, both personally and financially to succeed, and we believe that her interests as owner, director, and brand champion align closely with the goal of shareholders

 

Quantification of Potential Subscriber Growth

·         In 2010, WTW announced a marketing campaign with Jennifer Hudson. In the following year, they saw revenue growth of 25% ($370mm), and operating income growth of 40% ($150mm)...  while the Jennifer Hudson campaign was a great success, we would argue that Ms Winfrey’s campaign has the potential to be significantly more successful, given her tremendous popularity and following.

·       WTW has a base of ~20mm former members in their North American business, “many of whom have a high regard and affinity for our services and our brand” (per mgmt). This is an extremely large pool for Ms Winfrey to target

·         We believe that as Ms Winfrey is successful in her weight loss journey with WTW, the addressable market will continue to widen to virtually anyone who wants to lose weight, which we believe presents a enormously high ceiling in an upside case.

·         We believe it is very possible for Ms Winfrey's campaign to achieve 2mm incremental subscribers for WTW, which represents just a fraction of her followers and of former WTW members. We believe that the Hudson campaign provides a reasonable sanity check to this assumption.

 

Valuation

·         We arrive at a value of $87 per share in our upside case, $16 in our downside case, and a $50 probability-weighted expected value for WTW shares by year end 2016, versus ~$24 share price currently (see table below for detail)

·         Below is a list of our main assumptions:

o    2mm sub adds in our upside case, 1.5mm in our base case and 750k in our downside case; split 60/40 meeting v online subs

o    Current run-rate monthly revenue per sub ($42 and $18 for meeting/online subs, respectively)

o    ~70% incremental gross margins (which was the same level as 2011, the year of the Hudson campaign)

o    WTW guidance (15e) for Marketing, SG&A, D&A, Interest and Capex

o    10x EBITDA in our upside case, 9x in base case, and 8x in downside case

·         It is important to note the tremendous operating leverage in this business model. This, along with the financial leverage is what we believe made WTW such a compelling short investment (until the Winfrey transaction), and in our opinion, is what makes this such a tremendous opportunity on the long side currently.

 

EXPECTED VALUE ANALYSIS        
        Up Base Dn
Meeting Subs (000s)   2,304 2,004 1,554
Online Subs (000s)     2,269 2,069 1,769
Subs (000s)     4,573 4,073 3,323
Total Adds     2,000 1,500 750
             
Meeting Revs/Sub (monthly)   $42 $42 $42
Online Revs/Sub (monthly)   $18 $18 $18
Revs (Member Based)   1,651 1,457 1,165
Revs (Other)     120 110 100
Revs (WTW)     1,771 1,567 1,265
             
Gross Margin     59% 57% 54%
Gross Profit     1,045 893 683
Incremental Gross Margin   70% 69% 68%
             
Marketing     200 200 200
SG&A       185 185 185
Operating Income     660 508 298
D&A       55 55 55
EBITDA       715 563 353
Multiple       10.0x 9.0x 8.0x
EV       7,151 5,069 2,826
Less: Net Debt     1,898 1,898 1,898
Add: Est 1 Yr Cash Flow   343 252 126
Mkt Value     5,596 3,423 1,055
WTW VALUE PER SHARE (YE 16) $83 $51 $16
Prob       20% 60% 20%
EV       $50 110% up/(dn)
             
Est EPS       $4.8 $3.5 $1.6
Implied PE     17.3x 14.8x 10.0x
Implied FCFE     6.1% 7.4% 11.9%
Debt to EBITDA     2.7x 3.4x 5.4x

 

Technicals

·         Ms Winfrey and Artal together control over 50% of WTW common stock.

·         The float (ex Winfrey/Artal) is ~30mm shares, of which ~16mm shares were short as of Oct 15

·         Updated short interest as of Oct 30 should be out shortly. It is very likely that many shorts have covered over the past three weeks, however we would not be surprised if significant short interest still remains.

 

Catalysts

·         Further success by Ms Winfrey in her WTW program

·         Launch of Winfrey marketing campaign and WTW holiday program

·         WTW Q4 earnings (preliminary view of 2016 recruitment and 2016 guidance)

·         Continued short covering

 

 

 

Disclaimer

 

·        The author of this posting and related persons or entities ("Author") currently holds a long position in the securities mentioned above. The Author makes no representation that it will continue to hold positions in these securities. The Author is likely to buy or sell long or short securities of this issuer and makes no representation or undertaking that Author will inform Value Investors Club, the reader or anyone else prior to or after making such transactions. While the Author has tried to present facts it believes are accurate, the Author makes no representation as to the accuracy or completeness of any information contained in this note. The views expressed in this note are the only the opinion of the Author.  The reader agrees not to invest based on this note and to perform his or her own due diligence and research before taking a position in securities of this issuer. Reader agrees to hold Author harmless and hereby waives any causes of action against Author related to the above note

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

see write-up

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