Weight Watchers Guidance Comes in Too Light

Shares of Weight Watchers International (WTW) are trading down more than 13% just after the open on Friday morning because the company’s outlook for the year ahead disappointed Wall Street. The weight-management program known for point counting has endured a relatively difficult year and blames much of the difficult on a weak economy. Management expects 2010 to be challenging as well and has placed EPS guidance at $2.25 to $2.50, substantially below the consensus earnings expectation of $2.78 per share. Weight Watchers spoke to the need “to invest in initiatives to modernize their offering,” which may be related to a report out of Adweek that claims WTW’s $70 million advertising budget is reviewing its options.

Financial performance in the year just ended was actually fairly strong, as fiscal 2009 earnings came in at $2.68 per share and beat analysts’ expectations in each of the four quarters. Sales did slump about 9% in the year to $1.4 billion, but management was able to limit the impact on the bottom line to just 3.3% compared to fiscal 2008 through savvy cost cutting.

Weight Watchers’ results are closely tied to consumer sentiment, and many people cannot justify spending on weight loss when money is extremely tight. If you believe the consumer is due to rebound in 2010, then Weight Watchers would be a major beneficiary and could easily exceed the conservative guidance. At Ockham, we currently have a Greatly Undervalued rating on WTW as their valuation is quite attractive, and it has only become more attractive following the share’s collapse this morning. For example, historically WTW has traded for price-to-cash earnings multiples in the range of 16.2x- 24.8x, but the current price-to-cash earnings is only 10x. Furthermore, the current price-to-sales of 1.44x comes in well below their historically normal range of 2.75x-4.19x.

The guidance out of Weight Watchers should not be dismissed, but we think a lot of the difficulties seen in the year ahead have already been priced in. The company has decently strong underlying value based on the current fundamentals and value investors with a longer time frame may benefit from an eventual rebound in Weight Watchers business. In the interim the stock yields a respectable 2.7% at the current price, and we believe the downside is likely fairly limited at this point.

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