Interested in a small cap stock that may be overlooked?
Weight Watchers International (WW) could be a potential play for your portfolio. Like many stocks this company has been under scrutiny lately. Still, there are some bright spots and potential that may not be thought of at first.
Summary
According to Morningstar.com, WW is one of the largest providers of weight loss solutions. In 2021, they generated roughly $1.2 billion in sales.
Founded in 1963 by Jean Nidetch, the company quickly grew its members which originally started out as six women that wanted to lose weight. Soon, Jean was coaching members from all over the neighborhood.
Now, the company has grown over its history into a billion-dollar brand.
What has made WW unique is the ease at which a member can follow a plan to lose weight. Most notably, the company ranks foods by using a point system and only so many points are allowed during a timeframe.
However, WW has had some competition turn up as of late. The market for health and wellness is very competitive.
According to Morningstar.com, with all the history of WW, they still only have low single digit market share. Companies like Nutrisystem and Noom have made it easier for a customer to gain access to weight loss coaching.
From a financial standpoint, investors have been nervous about where the company continues to grow. Lately, they have struggled to grow into the health and wellness area.
With the access that smartphones and technology provide, now anyone can have a coach right in front of them. Yet, going from a simple weight loss approach to things like meditation and mental health coaching can be something different.
Bottomline: WW has not consistently grown their revenue and the stock has suffered as a result.
Still, the company has something working for them that gives them the chance to continue their journey as one of the first weight loss coaching platforms.
Check the numbers
It’s true that WW has some tough competition.
One thing I do like to ease competition is that the company has been around for some time. They have a brand that most people recognize.
Furthermore, WW also posts solid revenue and net income numbers. In 2021, they posted over $100 million in free cash flow, and this is consistent for the last decade.
Despite the solid financial background, the number that makes WW a stock to buy is not in their financial statements.
According to the CDC, about 37 million Americans have diabetes. Additionally, about 97 million Americans have prediabetes. Although these numbers don’t target specific people with weight issues (you don’t have to be overweight to have prediabetes), they do tell a scary story.
It is without question that we have a health problem in the US. Not all people who have diabetes necessarily need to lose weight, but the numbers don’t lie and they are saying that Americans will need help from a health and wellness standpoint.
If we are going to help fix this issue, people will need help with their overall health, and this includes weight loss. WW International is one of the companies that people will depend on to help them.
Another metric that is important to check is the return on invested capital or ROIC.
What is return on invested capital? According to TIP Finance (theinvestorspodcast.com), ROIC is a measure of how efficiently a company is allocating its resources to generate profits.
WW has a solid ROIC rate the last decade. Hovering around ten percent, the company has used its capital to invest in the right places to earn a decent return.
What to Watch
Despite the solid ROIC, one thing to watch with WW is their negative equity. The company has used debt in the past to help with their investments.
Looking at their financial statements, WW borrowed over a billion dollars to invest back into the business. This has been the main reason that the company posts negative equity on their balance sheet.
This is an important thing to watch because a company that has negative equity does not have any tangible assets to back up their valuation most often.
Nonetheless, WW can back this metric because it is a subscription-based service that has a steady flow of money coming into the business.
This is the main factor that should be looked at for their valuation making them a good stock to buy.
It may be hard to say, but the overweight population in our country gives WW a chance to be a company in need for many years to come. If they can continue to make their platform easy to use and attract subscribers, then the steady flow of income will continue.
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