Weight Watchers Looks Strong but Pricey

At this point, we think no-moat Weight Watchers' investment thesis has moved past its ability to adapt to weight-management industry changes, and instead toward asking what long-term assumptions are the appropriate ones to value this company. There was nothing in the updated 2017 guidance--$1.3 billion in revenue (implying 13% top-line growth) and EPS of $1.77-$1.83 (versus $1.57-$1.67, with half of the increase from current momentum and half from a lower tax rate)--that struck us as unreasonable. For 2018, we expect the firm will exceed the $1.4 billion revenue threshold needed for its 2018 net debt/EBITDAS target of 4.5 times (assuming revenue of $1.45 billion and mid-20s operating margins). With high-single-digit revenue growth and operating margins around 30% looking increasingly achievable from 2018 to 2021, we're planning a moderate increase to our $30 fair value estimate. While the market is pricing more aggressive medium-term assumptions, we concede that market expectations for 2018 look realistic and we see few near-term downside catalysts as Grossman's plans take shape.

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