Is Weight Watchers Oversold?

Jacob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Weight Watchers (NYSE: WTW) produces weight-loss products, solutions, and services. On Friday, the company's shares sold off in high volume and the stock fell below $40 for the first time in years. Basically, all its gains for the last three years were erased in one day.

The company generated $465 million in revenue and $1.39 per share in earnings this last quarter. It had to take a $20 million debt-refinancing charge, which played a role in the decreased net income compared to last year.

Furthermore, the company reduced its full year guidance from $3.60 to 3.90 to $3.55 to 3.70 and CEO David Kirchhoff resigned from his position. All this bad news battered the stock. So is now a good time to buy?

The internet helped and hurt operations

There is a movement towards eating healthier and watching one's lifestyle more closely. This is primarily because of increased internet awareness and higher healthcare costs related to bad dietary habits. As a result, Weight Watchers was able to grow its revenue from $1.39 billion to $1.82 billion between 2009 and 2012. Similarly, the company's online classes, which cost $5 per week, have become popular. 

But then, the internet not only brought awareness for the products and services of Weight Watchers, it also brought increased competition. There are tons of free applications that can help consumers manage their calories. And many have been successful in getting dieters to switch from Weight Watchers' paid program to their free platform.

During the last earnings call, management acknowledged this and admitted that it was having more trouble than ever in recruiting and retaining members who are willing to pay for its online services. This is very bad news and something that must be corrected.

Healthy snacks market

Furthermore, there are several food companies such as Kraft Foods (NASDAQ: KRFT) and General Mills (NYSE: GIS) that are producing healthier foods. These companies are attempting to gain market share in the "healthy food sector" and change the perception that they are "junk food" producers.

After spinning off Mondelez International, Kraft has been performing well. The company's share price jumped from $45 to $57 since the split, and still looks cheap with a P/E ratio around 18 (about the average for the market). Kraft also pays a dividend of 3.5%.

Kraft is seeking growth by introducing a larger variety of products and it's targeting higher margins by increasing its manufacturing efficiency. While it makes a wide variety of products, it lacks geographical diversity, since it only operates in the U.S. now.

General Mills is another interesting story. Year to date, the company's share price is up 30% and it too has an earnings multiple around 18. Unfortunately, its dividend is a tad lower than Kraft at 2.9%. General Mills has recently launched some yogurt and low-calorie snack products in order to gain a larger piece of the "healthy snack" pie.

Recently, General Mills has been losing market share in cereals. Perhaps, it will start launching healthier cereal options in order to gain share. Unlike Kraft, General Mills still enjoys a global presence and the company's international unit accounts for most of the growth. For example, in the last quarter, international sales increased by 26% while American sales rose by 2%. 

What about the departure of the CEO?

The new CEO of Weight Watchers will be the old Chief Operating Officer James Chambers, who left Kraft Foods less than a year ago. We don't know if Mr. Kirchhoff resigned because of bad performance, but he said he was looking to "to embark on something entirely new."

Generally, when CEOs abruptly leave, it's because of poor performance or health reasons. In this case, Weight Watchers hasn't been been performing so perhaps it was time for a change. When the CEO vacates his post, investors usually sell the stock. 

Is the company cheap?

Going forward, analysts expect Weight Watchers to earn $3.65 per share this year, $3.97 in 2014 and $4.26 in 2015. This gives the company a forward P/E ratio of around 10 for 2013 and 9 in the years to follow. After the sell-off, the company's valuation looks pretty cheap. If you were looking for a pullback to start a position, you definitely got it. 

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Jacob Steinberg has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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 has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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