What a brutal six months it’s been for WeightWatchers. The stock has dropped 60.4% and now trades at $10.66, rattling many shareholders. This may have investors wondering how to approach the situation.
Is there a buying opportunity in WeightWatchers, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think WeightWatchers Will Underperform?
Even with the cheaper entry price, we're cautious about WeightWatchers. Here are three reasons there are better opportunities than WW and a stock we'd rather own.
1. Revenue Spiraling Downwards
Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. WeightWatchers struggled to consistently generate demand over the last five years as its sales dropped at a 12.4% annual rate. This wasn’t a great result and is a sign of poor business quality.
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the last two years, WeightWatchers’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 3.6%, meaning it lit $3.65 of cash on fire for every $100 in revenue.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, WeightWatchers’s ROIC decreased by 1.3 percentage points annually each year over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We see the value of companies helping consumers, but in the case of WeightWatchers, we’re out. Following the recent decline, the stock trades at 3.8× forward EV-to-EBITDA (or $10.66 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. Let us point you toward an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of WeightWatchers
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