WW International Stock: There’s Reason To Be Hopeful

WW International (NASDAQ:WW), formerly known as Weight Watchers, has been on the decline in recent years as more people move away and onto different types of diets based on what’s sweeping social media and word-of-mouth. That means that the company’s revenues and share price have taken a nose dive in recent years and not many people expect them to regain the same influence.

But the company has been moving in the right direction to reestablish a solid fundamental standing and if they do manage to effectively rebrand themselves in the coming years – I do think they’ll be in a good and healthy position to capitalize off of that growth rather than playing catch up.

Let’s dive into those actions and see where it leaves us.

Paying Down Debt

While the company does remain profitable and generating cash flows, it has been using that to reduce their debt load and avoid paying such high interest expense as interest rates rise in the United States and around the world.

After reporting more than $2.3 billion in long term debt back in 2013 and through 2016, the company paid down almost $1 billion in long term debt and now holds roughly $1.42 billion in long term debt. This doesn’t only deleverage their balance sheet, but helps lower interest expense by both reducing this debt and also refinancing it to more favorable terms during the pandemic-era low interest rates.

The company was paying over $140 million in annual interest expense back in 2018 after interest rates got higher but the subsequent debt reduction and refinancing has lowered their interest expense by almost half and the company is set to pay just a bit over $75 million in interest expense in the coming year.

Given the fact that the company is making about $700 million in gross profits, which is expected to continue and decline, this $70 million in annual savings is one of the best uses of their cash flow and will allow them to invest more in marketing and program revamping if the case may rise.

Lowering Operational Expenses

Over the past few years, the company has been spending more on SG&A to better understand the market environment and market their products and services more efficiently. As a result, operating expenses increased even as revenues decreased. But all of that effort has not been in vein, as the company’s gross profit margin increased from about 57% to 61% in the past few years, generating better cash flows.

Now that the company’s efforts to increase those margins seem to have worked, they are moving towards lowering operating expenses and have thus far decreased SG&A (selling, general & administrative) costs by $20 million in each quarter, leading me to project that they’ll save about $75 million this year relative to the expenses last year.

These savings mean that if or when the company manages to effectively market or revamp their offerings to see revenue growth return, which is currently set for about 2 years from now, they are very well positioned to take full advantage and their valuation should be considerably higher.

Projected Growth Is Far Away, But Solid

For now, analysts expect the company to report a near 12.5% decrease in revenues for the coming year, dropping from $1.21 billion to $1.06 billion. After the next year is expected to be flat, those same expectations call for a near 4% increase in the company’s sales, up to $1.1 billion.

I would then expect the company to report about a 4% growth rate to sales, as they are projected to underperform the overall weight management market growth projections of around a 5% CAGR.

With an improved gross margin and a significantly lower interest expense environment, I do believe that the company will outperform the current EPS expectations, which call for a 46.8% drop in the current year, from $1.57 to $0.84. They are then projected to report a near 2% rise in EPS to $0.85 and then a further 25.7% jump in 2024 to $1.07.

I do believe that although the company’s likelihood to exceed those revenue expectations in the next few years is slim, I do believe that with their continued efforts to minimize expenses, that they’ll exceed their EPS ones.

Conclusion – Not Quite Ready, But Close

Even with the company growing EPS by around 10% on an averaged annualized basis from 2024 through 2030, a price to earnings ratio is hard to pinpoint since the company’s revenues remain rather volatile.

Even so, a price to earnings ratio of around 5x, accounting for some of that uncertainty, means that the company is potentially undervalued by as much as 20% through 2024, which is just on the border of worthiness for a long term investment.

The company does have a solid business which is profitable and they hold over $150 million in cash and equivalents, which should sustain them in the case where they need to increase marketing expenses or accelerate the transitions of some product pipeline.

Even though these factors are placing them in a very good spot for when or if they manage to boost revenues, the industry remains a little too volatile to constitute a long term investment at this time. I’ll be waiting to see if they’re able to generate any meaningful revenue beats in the coming quarters, which will put them on the path to solid EPS growth, since this will allow them to further deleverage their balance sheet, which will further increase profitability, and so on and so forth.

I remain cautiously optimistic about WW International’s long-term prospects.