Why Weight Watchers Could Gain in 2014

A positive attitude is critical for successful weight management, and it appears equally vital for the advancement of weight-management-company shares. Weight Watchers International (NYSE: WTW  ) , NutriSystem (NASDAQ: NTRI  ) , and Herbalife (NYSE: HLF  )  have all seen their stock prices move substantially in the last year on shifting investor sentiment. Of the three, Weight Watchers has clearly lagged, but the new year may give the company its opportunity for gains.

Needing to stop business decline
Weight Watchers shares have plunged nearly 40% in the last year as weak results soured investor attitudes. In the first nine months of 2013, revenue tumbled 5% year over year and operating income dropped 1.6%. Recent quarterly figures were even worse. Revenue declined 8.5%, and operating income deteriorated 5.8% compared to 2012.

Declining popularity for client group meetings, the company's cornerstone weight-management service, seems to be the problem. Meeting fees, which make up nearly 50% of all revenue, have dropped off dramatically. A 14.7% decrease in recent quarterly North American meeting attendance helped reduce fees by 13.4% from the prior year. But while it's currently struggling, the company does have a chance to turn things around.

Weight Watchers provides one of the few clinically proven weight-management plans with person-to-person support. Following the program does take significant effort, however. Competitive products that promise similar, more easily achieved results are likely luring customers away. But combining Weight Watchers industry-leading social-support approach with an improved use of technology could impede the competition. Using online capabilities to significantly increase program convenience, while still offering a personal touch, should minimize membership losses. The addition of a new president in North America and chief technology officer suggests the company is moving in that direction.

On any sign of stabilization, Weight Watchers shares could advance. Currently trading at roughly 9 times cash earnings, where cash earnings are basically net income plus non-cash charges such as depreciation and amortization adjusted for expected capital expenditures, the stock seems to have upside--especially when the discounted multiple is based on revenue of $1.6 billion and cash earnings of $210 million, noticeably lower than the company's $1.8 billion in sales and $261 million in earnings delivered in 2012.

A classic turnaround story
NutriSystem is a great example of how a turnaround can quickly improve investor sentiment. After five years of declining sales, NutriSystem showed some progress in 2013, and the shares more than doubled. Improvements continue with the company's top-line finally growing in the latest quarter. Revenue increased 5% year over year, which helped operating profits advance 36%.

Since most of NutriSystem's revenue is from weight-management product sales, having an effective offering that is easily acquired is imperative for success. The company now looks able to deliver a program that provides excellent results while also being extremely convenient. Typically sold as a monthly meals package, the company's product is easily purchased 24 hours a day, seven days a week by phone or Internet and directly shipped to the customer. Auto-delivery, where a month's worth of food supply is shipped automatically until the customer cancels, is also available.

Management has done a terrific job making the most of the company's advantages. Dawn Zier, the company's relatively new CEO, probably gets most of the credit for the recent success. The stock market certainly seems impressed with her efforts. Based on revenue of around $358 million and cash earnings of $15 million compared to $397 million in sales and $7 million in earnings produced in 2012, NutriSystem is currently priced enthusiastically at near 30 times earnings.

A change in attitude has propelled share price
Herbalife shares have nearly tripled from a 2013 low, basically due to a simple shift in investor sentiment. Accusations about the integrity of the company's network-marketing distribution system caused investors to flee the stock in late 2012. But as the charges failed to gain traction and company results continued to perform admirably, investor confidence returned and the shares soared. Currently trading at roughly 17 times earnings, based on sales of approximately $7.5 billion and cash earnings of $465 million, Herbalife's fairly optimistic valuation appears supported by recent results.

Company sales grew more than 19% in the latest quarter, with net income jumping more than 26% year over year. The global nature of Herbalife's business was also impressive. Sales in the U.S. and Canada only made up about 19% of total revenue. The company's business in South America and Central America, which accounts for about 20% of sales, saw a huge increase in dollar terms, rising 44% compared to 2012. The biggest gain in percentage terms came from China, where sales increased 76.6%, now making up more than 11% of all revenue.

Herbalife's performance in China may have also eased any lingering concerns about the company's business model. A Chinese retail-store presence selling directly to customers had to be developed to meet regulations. Growing sales under that retail model suggests that network marketing is not the only distribution method Herbalife can successfully implement. In addition, a recent Belgian appeals court judgement stating that the company's sales model is in full compliance with Belgian law likely furthered investor confidence.

Summary
Weight Watchers has certainly disappointed investors in 2013. The company's performance left much to be desired and its near-term outlook isn't very comforting. But investor sentiment can rebound quickly, as seen at NutriSystem and Herbalife. Investors may want to monitor Weight Watchers closely in 2014, as any sign of a successful turnaround could propel shares meaningfully higher. 

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