I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer too. But some growth stories are inevitably better than others. Hence this regular series. My goal? Out the Fakers, elevate the Breakers, and examine the growth stories stuck in between.

Next up: Weight Watchers (NYSE: WTW). Is this weight-loss educator growing sustainably enough for your portfolio? Let's get right to the numbers.

Foolish facts


Weight Watchers International

CAPS stars (out of 5) **
Total ratings 209
Percent bulls 83.3%
Percent bears 16.7%
Bullish pitches 25 out of 30
Highest rated peers Matthews International, Stewart Enterprises, Hillenbrand

Data current as of Feb. 20.

It's funny to see Fools give Weight Watchers just two of five stars after months of four-star treatment. Apparently, a 47% rally over the past week means that valuation is suddenly an issue. But is it really? After looking at the numbers, I'm not so sure.

Let's review. Rising demand in its subscription-based products allowed Weight Watchers to book a 160% gain in per-share earnings in the fourth quarter. Analysts were expecting $0.10 less than the $0.66 the company reported.

But that's nothing. Executives blew away even the most aggressive expectations in issuing 2011 guidance of $3.50 to $3.85 a share, well above the $2.77 a share consensus Wall Street had settled upon. The beat itself is impressive. More impressive is why management issued such bullish guidance.

"Despite very difficult weather this January in the U.S., we have seen robust growth in enrollments, attendances, and paid weeks in our NACO [North American Company-owned] meetings business. This has also been the case in the U.K. and Australia," CEO David Kirchhoff said in comments made during last week's Q4 earnings call.

In other words, the underlying business is improving organically. There are no gimmicks here. Trends simply favor further growth. Enough growth, in fact, to lift earnings 43% year over year if you compare the mid-point of 2011 guidance ($3.67 per share) to 2010's final tally ($2.56 a share).

That's why I find it hard to believe anyone thinks Weight Watchers is expensive. Paying 18 times management's midpoint estimate for current-year profit is not only reasonable, it's cheap. Weight-loss programs that work -- and Weight Watchers is one of the few that does -- never really go out of style.

The elements of growth





Normalized net income growth 5.9% (11.6%) 1.5%
Revenue growth 3.8% (8.9%) 4.7%
Gross margin 54.4% 52% 54.4%
Receivables growth N/M 4.7% (10.7%)
Shares outstanding (million) 73.7 77.0 76.9

Source: Capital IQ, a division of Standard & Poor's. N/M = not measurable.

Weight Watchers isn't without ups and downs, of course. That's to be expected. This is a cyclical business driven by consumers who want to get back in shape after the holidays. And yet, looking at the numbers, it appears that online subscriptions are helping add lower-cost, sustainable growth:

  • Growth investors like me love straight-line accelerating revenue growth leading to accelerating profit growth. We don't have that here, but we do have profits growing faster than revenue for the first time in three years. Kirchhoff and his team have become more efficient with their use of capital.
  • Pricing power is also something we like to see. Or, in lieu of that, excellent cost management leading to higher margins. Weight Watchers now rivals peer eDiets (Nasdaq: DIET) in gross margin, even though the latter exists entirely online.
  • Finally, while I don't mind dilution for the right reasons, it's always nice to see a fast grower return cash to shareholders via buybacks. Weight Watchers has retired more than 3 million shares over the past three years.

Competitor and peer checkup


Normalized Net Income Growth (3 yrs.)

Medifast (NYSE: MED) 85.2%
NutriSystem (Nasdaq: NTRI) (35%)
Weight Watchers (1.7%)

Source: Capital IQ. Data current as of Feb. 20.

Medifast is the great growth story of this group, but Weight Watchers' recent gains aren't to be underestimated. We've seen a number of businesses use the subscription model to great effect, notably in tech.

Take salesforce.com (NYSE: CRM). The cloud computing king may trade for an outrageous premium, but adding a steady stream of subscription software services has led to years of better-than-20% revenue growth and heady cash flow gains. Its newest offering, Chatter, adds to its subscription portfolio.

Grade: Sustainable
Fools buying Weight Watchers at current prices are buying a similar style of subscription services -- eTools, in this case -- without the premium associated with salesforce.com and other cloud computing stocks. That's why I've added the stock to my CAPS portfolio.

Now it's your turn to weigh in. Do you like Weight Watchers at these levels? Let us know what you think using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email, or replying to me on Twitter.

Interested in more info on the stocks mentioned in this story? Add Medifast, NutriSystem or Weight Watchers International to your watchlist.

Hillenbrand is a Motley Fool Income Investor recommendation. Weight Watchers is a Motley Fool Inside Value pick. salesforce.com is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Hillenbrand. The Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.