Does Weight Watcher’s Selloff Create a Buying Opportunity?

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Shares of Weight Watchers (NYSE: WTW) lost about one-fifth of their value on Friday, following a disappointing quarter and lowered forward guidance.

The company’s target market is certainly not going away anytime soon, but competition in the weight loss sector is increasing significantly. At these levels, Weight Watchers is trading at a bargain valuation, but would-be investors should be mindful of the following factors.

The shift to mobile is pressuring Weight Watchers

More consumers are abandoning traditional PCs (laptops, desktops) in favor of mobile alternatives (tablets, smartphones). This has pressured a number of major tech companies like Intel and Microsoft.

But Weight Watchers, too, has suffered. A quick perusal of Google Play or Apple's iTunes reveals dozens of free weight loss apps, and many of them are quite good.

Weight Watchers’ management has blamed these free apps on the company’s tepid online performance. Weight Watcher’s competing program, Weight Watchers 360, offers dieters the ability to track food intake, record exercise activities, and find recipes with a mobile app; however, unlike the competition, it carries a monthly subscription fee.

Weight Watchers’ believes these free alternatives to be little short of a fad, comparable to the Adkins diet of years past. Weight Watchers’ tried and true methods have been helping people lose weight for decades, and the company believes that -- in time -- dieters will return.

I’m not sure I buy into that notion. The free apps out there aren’t based on fad diets, but instead offer reasonable weight loss advice -- it’s just delivered in a way Weight Watchers isn’t used to.

Nutrisystem is in the middle of a turnaround

Weight Watchers’ biggest publicly traded rival, Nutrisystem (NASDAQ: NTRI), is in the midst of an ongoing turnaround. Should the company’s new management team be successful in reinvigorating Nutrisystem, Weight Watchers could suffer from a stronger competitor.

Nutrisystem’s stock is up nearly 30% since the company named a new CEO, Dawn Zier, last November. Zier has been on the job less than a year, but she’s had a notable success in the company’s partnership with Wal-Mart.

Thousands of Wal-Mart’s now offer 5-day starter trials of Nutrisystem’s diet food (unlike Weight Watchers, which has dieters monitor their food, Nutrisystem sells pre-packaged food for dieters to consume over the course of their weight loss journey), and the company has cited this initiative as successfully introducing new dieters to Nutrisystem’s program.

Moreover, investors interested in a weight loss stock might be better served buying Nutrisystem rather than Weight Watchers. Nutrisystem offers a very attractive dividend yield of 5.70% compared to Weight Watchers’ 1.80%.

More weight loss drugs are becoming available

Beyond other diet programs like Nutrisystem, Weight Watchers also has to contend with pharmaceuticals.

Arena Pharmaceuticals(NASDAQ: ARNA) weight loss drug Belviq became available in June. The drug is intended to help obese patients lose weight by reducing the feeling of hunger.

Despite record obesity rates, demand for Belviq has been quite tepid. Shares of Arena are down nearly 20% since the drug first went on sale.

Nevertheless, analysts remain bullish on the stock. Piper Jaffray believes that shares could hit $11.50, up from its current price near $7. As a new drug (indeed, a new class of drug -- rival Qsymia has been available for less than a year), it may take some time for Belviq to catch on.

Of course, while a drug like Belviq may represent a competitive threat to a diet system like Weight Watchers, it isn’t going to put Weight Watchers out of business anytime soon. On average, Belviq helps patients lose just a couple extra pounds, and that’s combined with diet and exercise programs.

Investing in Weight Watchers

Currently, Weight Watchers is trading with a price-to-earnings ratio of roughly 9, about half of the broader S&P 500. With the recent correction, the stock appears to be trading in bargain territory.

Yet, before any investors load up on the stock, they should consider the competitive landscape the company is facing. The rise of free weight loss mobile apps, a resurgent Nutrisystem, and the introduction of new weight loss drugs could continue to weigh on Weight Watchers’ results.

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