One way to uncover great companies is simply doing a screen of 10-year ROICs. Most of these companies are never available at decent valuations but Weight Watchers has had a particularly terrible year and is now trading at just under 14x trailing earnings.
My interest in Weight Watchers was piqued by its returns; in the past ten years, it returned an average of 20.7% on assets. Over the past five years, invested capital has actually dropped by $150m but free cash flow has increased by over $100m. Clearly, this speaks to the quality of the underlying business.
Weight Watchers makes the majority of its revenues from the fees charged to attend its meetings. Scepticism about this aspect of its business focuses on two points. First, there is a perception that online services (some of which are free) are just as effective. I do not know whether this is true or not but research does show that some of these services are effective; this does not nullify the fact that there is also a vast amount of research showing that Weight Watchers works too. Further, the company is growing its online business.
The second point is related; Weight Watchers is seen to be exploiting its customers. Investors are often too quick to dismiss this sort of claim. Weight Watchers really has nothing apart from a brand; perception (not truth) is key. At some level this claim seems accurate as it isn’t totally clear what the company brings to the table; isn’t Weight Watchers really just making money from bringing people together? However, the fact is that no-one else is doing this, no-one has the same record of success, and it is really hard for anyone (apart from perhaps a government) to break in and build the reputation/brand that Weight Watchers now has.
Weight Watchers was bought from Heinz by Artal (a private equity-ish company) in 1999. Since then, the company has expanded into new areas effectively leveraging the Weight Watchers brand and meetings. For example, in 1997 product sales at meetings were $30m, in the LFY they were over $330m. Another example is online revenue; this division was consolidated in 2004 with $65m in revenue, in the LFY it achieved just under $400m. The former seems to have grown to its limit and follow trends in meeting fees; the latter has compounded sales growth of over 20% for the…
