From Diet to Wellness

The bullish case for Weight Watchers

Published on:
March 2, 2019
Reading time: 4 Minutes.
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About The Author

Noam Ganel, CFA is the founder of Pen&Paper, a value-oriented, contrary-minded journal of the financial markets. Since 2010, Ganel works for Silvergate as Vice President in Capital Markets and provides advisory services to family offices,  private companies, and financial advisors on their capital allocation decisions.

"The staples of today's diet - cereals, dairy products, refined sugars, fatty meats, and salted, processed foods - are like diesel fuel to our bodies' metabolic machinery," writes Loren Cordain in The Paleo Diet"These foods clog our engines, make us fat, and cause disease and ill health." 

Indeed attempts to fight off the modern diet have been many. Consider, for example, William the Conqueror who refused to leave his room and drank only alcoholic drinks. Or according to Maimonides: 

"Anyone who conducts himself in the way specified, I guarantee that he will never get sick his entire life until he reaches a hoary old age and dies. He will not need a doctor, and his body will be perfect, and he will remain strong his whole life." 

And you probably heard of the low-carbohydrate Atkins diet, the Apple Cider Vinegar diet [1], or the strange Breatharian Diet that suggests that we can live off the nutrients in the air.


Most of the ideas are fads. They initially appeal and are marketed to our perpetual need to better ourselves and to look like the actors on our television. The goal behind trendy diets is invariably the same: to quickly lose weight so that we will feel better about our lives.

But the mindset to diet is now changing. Diet experts are replacing the word "diet" with "wellness." And according to Merriam-Webster Dictionary, while a diet is "a special course of food to which one restricts oneself, either to lose weight or for medical reasons," the word "wellness" is about the state of being in good health.

With $1.5 billion in market capitalization, Weight Watchers International (WTW on Nasdaq) has played a significant role in this evolution. You will not see the word diet on the company's website, but you will see many associations with wellness. 

Weight Watchers advertisements read: "Our philosophy is to help participants to lose weight by forming health habits, eating smarter, getting more exercise, and receiving support."

Magic Formula

I accidentally found Weight Watchers while looking atJoel Greenblatt's Magic Formula. (The website lists companies with high earnings and high returns on capital. You can read about Greenblatt's formula inThe Little Book That Beats The Market.)

WW is in the Magic Formula.

Between 2008 and 2017, Weight Watchers' average earnings per share were $2.52. As of its most recent filing, the company reported earnings per share were $3.49. And management has been buying its stock: In 2008 there was 78.5 million common stock compared to 69.8 million as of the third quarter of 2018.

During this decade, the stock traded hands as low as $9 in 2016 and as high as $87 in 2012. The average earnings multiple was between 8 and 22. The ratio peaked at 50 times in 2015 and troughed at five times in 2017.

It seemed worthwhile to read more about the company. So I downloaded the 10-k filings to learn a bit more about Weight Watchers; about its capital structure and management.

Weight Watchers  subscription model 

Weight Watchers sells three types of subscriptions: the Digital Subscription gives access to an app that tracks food habits and suggests recipes; a 3-month plan costs $13.30. 

The Studio Subscription includes all the benefits of the Digital Subscription and an in-person workshop. A friend of mine has attended one of these workshops and found them to be effective. It costs $29.96 for a 3-month package.

The Coaching Subscription provides unlimited phone calls and messages to a personal coach. It costs $54.95 per month. 

I was happy to see that the company grew its subscriber base by 30% in 2018 compared to 2017 and by 50% compared to 2016. But the company's capital structure is alarming. It reports on $1.4 billion in total assets and $2.22 billion in total liabilities. 

The quarterly trend in operating income to interest expense ratio was not promising either. Over the past two quarters, the ratio was about three times [2]. But I overlooked this negative trend because of Weight Watchers' management.

I am glad to own share in a company that is advocating wellness.

Defined as a "controlled company" link per Nasdaq rules, Ms. Oprah Winfrey and the Artal Group own over 50% of the voting rights. Considered one of the most influential people from 2004 and 2011 by TIME magazine, Winfrey does not need any introduction. But the Artal Group does. 

Headed by Raymond Debbane, this little and unheard of private equity firm is rumored to have accomplished one of the best private equity deals of the last two decades. The $224 million that Artal Group invested in Weight Watchers in 1999 is now worth over $5.2 billion.

***

That the leading cause of death in the United States - responsible for 35 percent of all deaths - is heart and blood vessel disease should bother us all because it is preventable. 

According to Loraine's book, 73 million Americans have high blood pressure, 34 million have high cholesterol levels, and 17 million have type 2 diabetes. I am glad to own shares in a company that is fighting these statistics.

FOOTNOTES
[1] The Apple Cider Vinegar diet prescribes the consumption of three teaspoons of the tonic before each meal. [2] I expect the operating income to interest expense to be two times in 2019