In This Article:
Weight Watchers International (NYSE: WTW) may be the biggest turnaround story in the last few years. In 2015, the stock traded below $4 per share as Weight Watchers cut its profit forecast 50% below analyst expectations and instituted an $100 million cost-cutting plan.
In October of that year, the stock received a brief respite from bad news, receiving a vote of confidence from Oprah Winfrey. Shares rallied when it was disclosed the media mogul paid $43.5 million for a 10% stake in the company and joined the company's board of directors. The resulting rally has powered through 2018, pushing the stock to $80 per share while making Oprah hundreds of millions of dollars.
Image Source: Getty Images
In the last month, however, the rally has reversed, with the sell-off picking up steam. After a three-year run, has Weight Watchers stock peaked?
Subscriber growth miss
By most accounts, Weight Watchers had a strong quarter. On a year-over-year basis, the company increased revenue by nearly 20% and earnings per share by 51%, both of which beat analysts' expectations. Although the latter figure was aided by lower tax rates, operating income margins increased, pointing to a leaner and more-efficient company.
| Q2 2018 | Q2 2017 | YOY Change | |
|---|---|---|---|
| Revenue | $409.7 | $341.7 | 19.9% |
| Earnings per share | $1.01 | $0.67 | 50.7% |
| Total subscribers | 4.5 | 3.5 | 28.6% |
Revenue and subscribers in millions. Source: Weight Watchers International.
However, investors were unimpressed and expressed concern regarding the company's subscriber figures: Although the total increased significantly over the prior year, moving up by 29%, it narrowly missed expectations of 4.6 million.
The $6 billion curse?
While we at The Motley Fool avoid technical analysis, it's notable that the company's market capitalization of $6 billion appears to be a psychological barrier. Whenever the company has approached the figure, or briefly surpassed it, it sells off soon thereafter. The question investors should ask is if today's Weight Watchers is a better company than it was at those periods.
Data by YCharts.
Simply put, yes, it is a better-run company. From 2005 to 2015, the company went on a debt-fueled stock buyback binge, which allowed it to mask declining operational performance with increased earnings per share.
For example, in 2014, the company reported $1.74 per share in diluted earnings, which was narrowly higher than the $1.67 it reported in 2005. However, net income fell from $174 million to $99 million, and the gains were all on reduced share counts. The next year, the bottom fell out and forced the company to improve.