Thoughts on the Weightwatchers Stock
As I go through the 10K for WTW weightwatchers 2013 these are the thoughts that come to mind, I post then here to mostly make myself a better investor as writing down my own thoughts will help me in future, and hopefully I can share these with others.
What the Company does :
I believe this is Important to know that I know what the company does and how it makes Money before I buy its stock. So, WTW is Well known in Weight loss Industry and is the biggest player there, Its business has two arms - Online and Meetings, which it conduct worldwide. People who wants to loose weight come to attend meetings once weekly. This meeting is conducted by a leader which was originally one of them in past. Weight Watchers Online provides interactive and personalized resources that allow users to follow our weight management plans via the Internet or on their mobile device.
Here's how WTW describes themselves - "We are a leading, global-branded consumer company and the world’s leading provider of weight management services, operating globally through a network of Company-owned and franchise operations."
Is The company Conservatively Financed : NO
Well That's why the Stock price is down, people are thinking the company wont be able to pay the debt.
Lets Look at the Solvency Ratios: Current Ratio 2013 - 0.92 & Quick Ratio 0.84, and company has always paid debt in past, but again past is no way to tell what will happen in future. But certainly looking at cash flow, they have enough cash to pay interest, and Company stopped paying Dividends, so they can make timely interest payments.
So, even though they might be able to make interest payments easily, they have a large amount of debt.
Shareholder Friendly management :
Look at the cash flow statement, line 5 show company Acquired 1.5 Billion of its own stock in 2012. and paid dividends, which are good signs. It paid dividends from 2006 to 2013, and just declared that it will stop paying dividends in order to pay its debt and interest.
Note : 5 out of 7 Board Of directors are related to Artal group and it trades as a Controlled company on stock exchange.
The problem here is that at least in near future they are unlikely to pay dividends and buy back stocks even though its the perfect time to buyback stock ( its depressed) as the company has a Large debt. Large part of earnings will go to paying interest and principle on the debt they have.
Is the Business Cheap ?
Lets look at the numbers: PE ratio 7.3 with Yield of 13.7 %
Cash flow Ratio 5.28 and FCF yield 18.9%
definitely looks like when compared with current market,
Final thoughts : The company has done well in past and its stock sold as high as 80$ in 2012 and now it sells close to 20$ ( 22.96 at time of writing) but now is facing trouble, atleast its immediate future doesnt seem very bright, but I am thinking of long run and still I cant convince myself to buy as I dont see a clear strategy on to how the management will create more value for shareholders now, and if I have to convince myself, its not a buy for me. I might be wrong on this but as Warren Buffett said
As I go through the 10K for WTW weightwatchers 2013 these are the thoughts that come to mind, I post then here to mostly make myself a better investor as writing down my own thoughts will help me in future, and hopefully I can share these with others.
What the Company does :
I believe this is Important to know that I know what the company does and how it makes Money before I buy its stock. So, WTW is Well known in Weight loss Industry and is the biggest player there, Its business has two arms - Online and Meetings, which it conduct worldwide. People who wants to loose weight come to attend meetings once weekly. This meeting is conducted by a leader which was originally one of them in past. Weight Watchers Online provides interactive and personalized resources that allow users to follow our weight management plans via the Internet or on their mobile device.
Here's how WTW describes themselves - "We are a leading, global-branded consumer company and the world’s leading provider of weight management services, operating globally through a network of Company-owned and franchise operations."
As of the end of fiscal 2013, approximately 14% of our total worldwide attendance was represented by franchised operations. Franchisees typically pay us a fee equal to 10% of their meeting fee revenues. But Company has been Actively Aquiring the Franchise Rights.
Brief History :
Early Development
In 1961, Jean Nidetch, our founder, attended a New York City obesity clinic and took what she learned from her personal experience at the obesity clinic and began weight-loss meetings with a group of her overweight friends in the basement of a New York apartment building. Under Ms. Nidetch’s leadership, the group members supported each other in their weight-loss efforts, and word of the group’s success quickly spread. Ms. Nidetch and Al and Felice Lippert, who all successfully lost weight through these efforts, formally launched our business in 1963. Weight Watchers International, Inc. was incorporated as a Virginia corporation in 1974 and succeeded to the business started in New York in 1963. Heinz acquired us in 1978.
Artal Ownership
In September 1999, Artal Luxembourg, S.A., or Artal Luxembourg, acquired us from Heinz. Artal Luxembourg is an indirect subsidiary of Artal Group, S.A., which together with its parents and its subsidiaries is referred to in this Annual Report on Form 10-K as Artal. Currently, Artal Luxembourg is the record holder of all our shares owned by Artal.
WeightWatchers.com Acquisition
Currently owns of 100% of WeightWatchers.com.
Competition :
There are some other players In market but they Offer Totally different Services, Like Nutrisystem, Medifast etc. Weightwatchers Offer Advice and Services totally different and it remains the biggest player.
But its online segment is Really being affected nowadays due to The free apps offering similar tools for weight loss. And We will talk late to Show that online segment is generating more and more revenue for the company every year.
Why the Buzz: Company is in News recently due to having too much debt and there is doubt if it will be able to pay its Interest on the debt and the Principle, so the stock price has tumbled and the earnings are on fall, so its really looking cheap now, but the Big Question now is that IS it still worth your Money?
If you want to dive into details of debt read pages 61 o 63 of 10k. I will give a brief summary.
Compay had 2.29 Bil Debt in 2012 and now took a little more debt and refinanced all of the debt to total Outstanding long term debt of 2.358 Bil
Company has a revolving debt of 250 mil
Tranche B1 Debt of 298 Mil on which interest is 2.92 % ( since feb 21 2014 it is 0.25% higher )
Tranche B2 Debt of 2089 Mil on which Interest rate is 3.75 % ( since feb 21 2014 it is 0.25% higher )
Lets Go through the steps that I would like to go through likely every stock that I am buying.
Do I understand what the company does, Is it beyond my circle of Competence? Short Answer I do understand the Business and how it makes Money.
Does The Company has a Competitive advantage ?
There is no one out there who does the same thing which weight watchers do, But still seems like temporarily WTW is in trouble and both meetings and online revenue is going down, but The room for Expansion is huge, within USA and Internationally.
They Have an advantage over Competition as they don't offer the same thing as WTW and to build a system like WTW will have High barrier to entry especially of this scale, with the Reputation it has, Most of the Meetings business is through Mouth to mouth referrals.
But do they have a Moat, Not really, Free apps are giving weight watchers a challenge right now, and near future doesn't look much brighter, but in long term they have much more room for Expansion. I don't see weight watchers going anywhere for next 3-5 yrs ( That's the Time Horizon of investment I am looking for at least ).
But there is no way for us to know what they will do in future, I see no signs at this time of any recovery in earnings. And even if they do make more in future a large chunk of it will go to paying back the debt. So nothing is left for shareholders.
Is the Business Profitable and has a Consistent Track Record of doing so :
This is from Morningstar, as You can see The Company has High Margins.
http://financials.morningstar.com/ratios/r.html?t=WTW®ion=USA&culture=en-us
Now Interestingly as the compay has More Debt that Assets its Equity is Negative. So ROE is negative for may yrs so we Look at ROA in this case.
Brief History :
Early Development
In 1961, Jean Nidetch, our founder, attended a New York City obesity clinic and took what she learned from her personal experience at the obesity clinic and began weight-loss meetings with a group of her overweight friends in the basement of a New York apartment building. Under Ms. Nidetch’s leadership, the group members supported each other in their weight-loss efforts, and word of the group’s success quickly spread. Ms. Nidetch and Al and Felice Lippert, who all successfully lost weight through these efforts, formally launched our business in 1963. Weight Watchers International, Inc. was incorporated as a Virginia corporation in 1974 and succeeded to the business started in New York in 1963. Heinz acquired us in 1978.
Artal Ownership
In September 1999, Artal Luxembourg, S.A., or Artal Luxembourg, acquired us from Heinz. Artal Luxembourg is an indirect subsidiary of Artal Group, S.A., which together with its parents and its subsidiaries is referred to in this Annual Report on Form 10-K as Artal. Currently, Artal Luxembourg is the record holder of all our shares owned by Artal.
WeightWatchers.com Acquisition
Currently owns of 100% of WeightWatchers.com.
Competition :
There are some other players In market but they Offer Totally different Services, Like Nutrisystem, Medifast etc. Weightwatchers Offer Advice and Services totally different and it remains the biggest player.
But its online segment is Really being affected nowadays due to The free apps offering similar tools for weight loss. And We will talk late to Show that online segment is generating more and more revenue for the company every year.
Why the Buzz: Company is in News recently due to having too much debt and there is doubt if it will be able to pay its Interest on the debt and the Principle, so the stock price has tumbled and the earnings are on fall, so its really looking cheap now, but the Big Question now is that IS it still worth your Money?
If you want to dive into details of debt read pages 61 o 63 of 10k. I will give a brief summary.
Compay had 2.29 Bil Debt in 2012 and now took a little more debt and refinanced all of the debt to total Outstanding long term debt of 2.358 Bil
Company has a revolving debt of 250 mil
Tranche B1 Debt of 298 Mil on which interest is 2.92 % ( since feb 21 2014 it is 0.25% higher )
Tranche B2 Debt of 2089 Mil on which Interest rate is 3.75 % ( since feb 21 2014 it is 0.25% higher )
| Long-Term Debt |
The components of the Company’s long-term debt were as follows:
| December 28, 2013 | December 29, 2012 | |||||||||||||||
| Balance | Effective Rate | Balance | Effective Rate | |||||||||||||
Revolving Facility due April 2, 2018
| $ | 0 | 0.00 | % | $ | 0 | 0.00 | % | ||||||||
Tranche B-1 Term Facility due April 2, 2016
| 298,500 | 2.97 | % | 0 | 0.00 | % | ||||||||||
Tranche B-2 Term Facility due April 2, 2020
| 2,089,500 | 3.75 | % | 0 | 0.00 | % | ||||||||||
Revolver A-1 due June 30, 2014
| 0 | 0.00 | % | 6,374 | 3.12 | % | ||||||||||
Revolver A-2 due March 15, 2017
| 0 | 0.00 | % | 23,626 | 2.56 | % | ||||||||||
Term A-1 Loan due January 26, 2013
| 0 | 0.00 | % | 38,226 | 1.53 | % | ||||||||||
Term B Loan due January 26, 2014
| 0 | 0.00 | % | 129,445 | 1.90 | % | ||||||||||
Term C Loan due June 30, 2015
| 0 | 0.00 | % | 113,808 | 2.72 | % | ||||||||||
Term D Loan due June 30, 2016
| 0 | 0.00 | % | 118,217 | 2.77 | % | ||||||||||
Term E Loan due March 15, 2017
| 0 | 0.00 | % | 1,154,651 | 2.53 | % | ||||||||||
Term F Loan due March 15, 2019
| 0 | 0.00 | % | 822,017 | 3.92 | % | ||||||||||
Total Debt
| 2,388,000 | 3.49 | % | 2,406,364 | 2.91 | % | ||||||||||
Less Current Portion
| 30,000 | 114,695 | ||||||||||||||
Total Long-Term Debt
| $ | 2,358,000 | $ | 2,291,669 | ||||||||||||
Lets Go through the steps that I would like to go through likely every stock that I am buying.
Do I understand what the company does, Is it beyond my circle of Competence? Short Answer I do understand the Business and how it makes Money.
Does The Company has a Competitive advantage ?
There is no one out there who does the same thing which weight watchers do, But still seems like temporarily WTW is in trouble and both meetings and online revenue is going down, but The room for Expansion is huge, within USA and Internationally.
They Have an advantage over Competition as they don't offer the same thing as WTW and to build a system like WTW will have High barrier to entry especially of this scale, with the Reputation it has, Most of the Meetings business is through Mouth to mouth referrals.
But do they have a Moat, Not really, Free apps are giving weight watchers a challenge right now, and near future doesn't look much brighter, but in long term they have much more room for Expansion. I don't see weight watchers going anywhere for next 3-5 yrs ( That's the Time Horizon of investment I am looking for at least ).
But there is no way for us to know what they will do in future, I see no signs at this time of any recovery in earnings. And even if they do make more in future a large chunk of it will go to paying back the debt. So nothing is left for shareholders.
Is the Business Profitable and has a Consistent Track Record of doing so :
This is from Morningstar, as You can see The Company has High Margins.
http://financials.morningstar.com/ratios/r.html?t=WTW®ion=USA&culture=en-us
| Margins % of Sales | 2004-12 | 2005-12 | 2006-12 | 2007-12 | 2008-12 | 2009-12 | 2010-12 | 2011-12 | 2012-12 | 2013-12 | TTM |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 |
| COGS | 47.53 | 45.23 | 45.18 | 44.52 | 45.63 | 47.96 | 45.55 | 42.44 | 40.73 | 41.94 | 42.75 |
| Gross Margin | 52.47 | 54.77 | 54.82 | 55.48 | 54.37 | 52.04 | 54.45 | 57.56 | 59.27 | 58.06 | 57.25 |
| SG&A | 22.63 | 28.50 | 24.01 | 25.79 | 26.69 | 26.54 | 27.57 | 27.53 | 31.31 | 31.34 | 32.37 |
| R&D | — | — | — | — | — | — | — | — | — | — | — |
| Other | — | — | — | — | — | — | — | — | — | — | — |
| Operating Margin | 29.84 | 26.28 | 30.81 | 29.69 | 27.68 | 25.49 | 26.88 | 30.03 | 27.96 | 26.72 | 24.88 |
| Net Int Inc & Other | -1.59 | -2.01 | -4.01 | -7.44 | -5.91 | -4.75 | -5.31 | -3.48 | -5.14 | -7.27 | -7.09 |
| EBT Margin | 28.25 | 24.26 | 26.81 | 22.25 | 21.77 | 20.74 | 21.57 | 26.56 | 22.82 | 19.45 | 17.79 |
Now Interestingly as the compay has More Debt that Assets its Equity is Negative. So ROE is negative for may yrs so we Look at ROA in this case.
| Profitability | 2004-12 | 2005-12 | 2006-12 | 2007-12 | 2008-12 | 2009-12 | 2010-12 | 2011-12 | 2012-12 | 2013-12 | TTM |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Tax Rate % | 32.64 | 37.56 | 36.54 | 38.38 | 39.48 | 39.84 | 38.53 | 37.00 | 38.26 | 38.95 | 39.24 |
| Net Margin % | 17.86 | 15.15 | 17.01 | 13.71 | 13.30 | 12.68 | 13.38 | 16.76 | 14.09 | 11.87 | 10.81 |
| Asset Turnover (Average) | 1.29 | 1.39 | 1.34 | 1.43 | 1.43 | 1.28 | 1.33 | 1.64 | 1.56 | 1.31 | 1.17 |
| Return on Assets % | 23.09 | 21.12 | 22.83 | 19.64 | 18.98 | 16.16 | 17.82 | 27.54 | 22.00 | 15.58 | 12.69 |
| Financial Leverage (Average) | 4.15 | — | — | — | — | — | — | — | — | — | — |
| Return on Equity % | 96.97 | 301.24 | — | — | — | — | — | — | — | — | — |
| Return on Invested Capital % | 29.53 | 28.17 | — | — | — | — | — | — | — | — | — |
| Interest Coverage | — | — | — | — | — | 5.35 | 5.11 | 9.07 | 5.61 | 4.25 | 3.76 |
So Margins Look Good
EPS for last 10 yrs
Compound Annual Growth Rate 8.72%
Lets Look at Cash flow.
these are decent numbers.
But Equity is negative, so Book value here is negative too which isn't good. So here now we are starting to see numbers that doesn't represent a decent business.
Is The company Conservatively Financed : NO
Well That's why the Stock price is down, people are thinking the company wont be able to pay the debt.
Lets Look at the Solvency Ratios: Current Ratio 2013 - 0.92 & Quick Ratio 0.84, and company has always paid debt in past, but again past is no way to tell what will happen in future. But certainly looking at cash flow, they have enough cash to pay interest, and Company stopped paying Dividends, so they can make timely interest payments.
So, even though they might be able to make interest payments easily, they have a large amount of debt.
Shareholder Friendly management :
Look at the cash flow statement, line 5 show company Acquired 1.5 Billion of its own stock in 2012. and paid dividends, which are good signs. It paid dividends from 2006 to 2013, and just declared that it will stop paying dividends in order to pay its debt and interest.
Financing activities:
| ||||||||||||
Proceeds from new term loans
| 2,400,000 | 1,449,397 | 0 | |||||||||
Net borrowings/(payments) on revolver
| 70,000 | 30,000 | (174,000 | ) | ||||||||
Payments on long-term debt
| (2,488,364 | ) | (124,833 | ) | (139,285 | ) | ||||||
Payment of dividends
| (29,571 | ) | (51,961 | ) | (51,624 | ) | ||||||
Payments to acquire treasury stock
| 0 | (1,504,189 | ) | (34,924 | ) | |||||||
Deferred financing costs
| (44,817 | ) | (26,248 | ) | 0 | |||||||
Proceeds from stock options exercised
| 16,187 | 12,688 | 42,040 | |||||||||
Tax benefit of restricted stock units vested and stock options exercised
| 2,132 | 4,026 | 5,831 | |||||||||
Cash used for financing activities
| (74,433 | ) | (211,120 | ) | (351,962 | ) |
Note : 5 out of 7 Board Of directors are related to Artal group and it trades as a Controlled company on stock exchange.
The problem here is that at least in near future they are unlikely to pay dividends and buy back stocks even though its the perfect time to buyback stock ( its depressed) as the company has a Large debt. Large part of earnings will go to paying interest and principle on the debt they have.
Is the Business Cheap ?
Lets look at the numbers: PE ratio 7.3 with Yield of 13.7 %
Cash flow Ratio 5.28 and FCF yield 18.9%
definitely looks like when compared with current market,
Final thoughts : The company has done well in past and its stock sold as high as 80$ in 2012 and now it sells close to 20$ ( 22.96 at time of writing) but now is facing trouble, atleast its immediate future doesnt seem very bright, but I am thinking of long run and still I cant convince myself to buy as I dont see a clear strategy on to how the management will create more value for shareholders now, and if I have to convince myself, its not a buy for me. I might be wrong on this but as Warren Buffett said
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
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