Three Weight Loss Companies Just Got A Huge Boost

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

Up until now, weight loss was a personal issue and social stigma. That's all about to change since the American Medical Association (AMA) has voted to recognize obesity as a disease. This is going to be a huge long-term boost to Weight Watchers (NYSE: WTW), NutriSystem (NASDAQ: NTRI), and Medifast (NYSE: MED).

Getting Care

Obesity has long been an issue associated with an inability to control one's habits. Eating right and exercise were the generally accepted solution to the problem. However, for many people, the ability to follow a healthier routine is just too difficult.

Being overweight leads to many ills, including diabetes. Such complications, though, are not certain and take time to develop, so there's often no impetus to deal with weight right away. However, once a health condition like diabetes is diagnosed, dealing with the problem is expensive and life altering in a not so positive way.

To get ahead of such medical issues, the AMA has decided to label obesity as a disease. That will allow it to be treated earlier, make people take excessive weight gain more seriously, and likely lead to third party payments. That last one is a huge opportunity for companies dealing with weight loss.

The Leader in the Space

Weight Watchers is a global giant in the weight loss business. The key to its success is building communities that provide mutual support on a common goal. This differentiates its business model and makes customers very loyal. The company's brand is well known and it has a massive store base, which furthers the appeal.

The company doesn't try to directly control a customer's food intake, instead focusing on teaching people how to eat using a point system. That said, the brand is so strong that Weight Watchers has been able to partner with restaurants and food processors to give its “seal of approval” to select foods.

Because Weight Watchers' business model is group based, it would be very easy for third party payers to participate. Weight Watchers could simply track attendance or set up groups within corporate settings for a fee. Either one could materially increase the company's customer base.

Sales and earnings dipped during the 2007 to 2009 recession, but have been headed higher since. The dividend was recently increased, as well. With a trailing price to earnings ratio of about 10, the shares are relatively cheap. The AMA's aggressive stance on obesity could be the catalyst needed to push the top and bottom lines higher.

Cooking for You

NurtiSystem takes a different approach to weight loss. It designs and sells meal plans, taking over the food choice decision from its customers. That's an expensive proposition, however, and the recession wasn't kind to discretionary spending. Sales have fallen every year since 2007. Earnings dipped into the red last year.

That's not a particularly appealing portrait. However, if obesity is a disease, then a medical treatment can be prescribed. Since some people clearly have difficulty controlling their eating habits, NutriSystem is an obvious and easy solution. Adding to the appeal here is that the company has meal plans designed specifically for diabetics. That gives it a chance to serve both the obesity and diabetic markets.

This is a high-risk turnaround play. That said, the company has no long-term debt and $35 million in cash, as of the first quarter. The AMA ruling could mark an important turning point.

Medical and Multi-Level

Medifast takes a decidedly medicinal approach to weight loss. The company sells replacement meals, one-on-one support via a “health coach,” runs Weight Control Centers, and partners directly with doctors. That could give it a leg up on the other two companies since it already has an in at the doctor's office.

Sales have grown each year for a decade, but have really taken off since the recession, more than doubling since 2009 to over $350 million. Earnings have been more volatile, but the company has earned over a dollar a share in each of the last three years and hasn't lost money in any of the past ten years.

The only drawback is that there is a multi-level marketing aspect to the program. While this has helped push growth, this model doesn't get viewed as favorably by some customers and many regulators. That could make the switch to third-party payments more complicated. Still, the company has a solid and growing business, and should benefit from the AMA's ruling. You just have to be willing to invest in its business model.

The Holy Grail

Third-party payments are the Holy Grail when it comes to medical products and services. The AMA is setting up the weight loss industry to qualify for such payments. That will change the market and entrenched industry players like Weight Watchers, NutriSystem, and Medifast should be among those that benefit.

Reuben Brewer 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!

blog comments powered by Disqus