WTW

Why I bought a few shares

Published on:
March 2, 2019
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Noam Ganel is the voice behind Pen & Paper, a value-oriented stock research publication. He  serves as  Vice President in Capital Markets at Silvergate Bank and holds the Chartered Analyst Credential (CFA).

At some point you will look for ways to lose weight. In The Paleo Diet, Loren Cordain writes that "the staples of today's diet - cereals, dairy products, refined sugars, fatty meats and salted, processed food - are like diesel fuel to our bodies' metabolic machinery.” These foods, he emphasizes, clog our engines, make us fat and cause disease and ill health.

Attempts to fight off the modern diet have been many. In the 11th century, William the Conqueror refused to leave his room and drank only alcoholic drinks. In chapter 3 of the Book of Knowledge of the Mishna, Maimonides explained what a healthy diet is and wrote that "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." 

More recently, you probably heard of the low-carbohydrate Atkins diet, the Apple Cider Vinegar diet - which argues for consuming 3 teaspoons of the tonic before each meal - or the strange Breatharian Diet that suggests that we 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 TV actors. The goal behind these fad diets is athe same: to quickly lose weight so that we feel better about our lives.  

But the mindset to diet is changing. Diet experts now replace the word "diet” with "wellness." And according to Merriam-Webster Dictionary, a diet is "a special course of food to which one restricts oneself, either to lose weight or for medical reasons.” But the word “wellness” is 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. As an illustration, 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 first saw WTW on Joel Greenblatt's Magic Formula. The website lists companies with high earnings and high return on capital. You can read about Greenblatt’s formula in The Little Book That Beats The Market

How I found WTW. This list appeard on the Magic Formula Website

Between 2008 and 2017, Weight Watchers’s average earnings per share were $2.52. As of its most recent filing, the company reported earnings per share of $3.49. And management has been buying its own stock: In 2008 there were 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 5 times in 2017.

This statistical record was remarkable, I thought, and downloaded the company's 10-k filings glossary to learn more about the company, its capital structure and management.

The company, its capital structure and management

Weight Watchers sells three types of subscriptions: the Digital Subscription gives access to an app that tracks food habits and suggest receipts; 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 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. The company reports 4.2 million subscribers as of the third quarter of 2018. I was happy to see that the company grew its subscriber base by 30% 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. Unsurprisingly, the company reports on a deficit in equity. The quarterly trend in operating income to interest expense ratio is not promising either. Over the past two quarters the ratio was about 3 times, and I expect the ratio will be 2 times in 2019. But I overlooked this negative trend because of Weight Watchers’s management.

Defined as a "controlled company" link per Nasdaq rules, over 50% of the voting rights are owned by Ms. Oprah Winfrey and the Artal Group. Considered one of the most influential people from 2004 and 2011 by TIME magazine, Winfrey does need further 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 WTW in 1999 is now worth over $5.2 billion.

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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.