Put Weight In Your Pocket By Selling Puts Against WW International (NASDAQ:WW)


Thesis

The dirty little secret of every company pitching weight loss and weight management plans is that diets do not work. You can swap the names around, give it new nomenclature, dress it up with scientific gobbledegook, but diets are all the same, and they do not work for the long term.

Every few years a study comes out demonstrating that diets do not work for the long term. This makes sense logically, because if diets did work over the long term, then weight loss companies would run out of customers over time.

Here’s a study out of NIH which concluded the following:

Substantial weight loss is possible across a range of treatment modalities, but long-term sustenance of lost weight is much more challenging, and weight regain is typical. In a meta-analysis of 29 long-term weight loss studies, more than half of the lost weight was regained within two years, and by five years more than 80% of lost weight was regained.

So we are loading up on the ice cream!

Maybe this is why Weight Watchers changed its corporate name to WW International (WW), and moved away from words like “diet” and “weight loss” to:

“We are a global wellness company…In 2018, we announced new articulations of our brands, including our evolving focus on WW, to further reinforce our mission to focus on overall health and wellness. We educate our members and provide them with guidance and an inspiring community to enable them to develop healthy habits

“Diet” and “weight” are bad words in the new world of branding. That’s really saying something (or not saying it) for a company that called itself Weight Watchers for over 50 years and built a name brand.

Indeed, the company has utterly changed its consumer-facing language in this regard:

“In each of our major markets, we offer services and products that are based on our new, customized, healthy weight management program, known as myWWin, in the majority of our markets. The program is founded on a holistic approach for the body and mind to help each of our members lead a healthier, more active, more fulfilling life, and provides flexibility to make significant changes towards that life. It is comprised of a range of nutritional, activity, behavioral and lifestyle tools and approaches that can be personalized for maximum livability, based on the understanding that everyone’s needs and eating patterns are different. Our program also gives members science-based techniques that guide them to a helpful mindset. There are three comprehensive ways to follow myWW – the Green, Purple, or Blue food plan – each of which is grounded in our SmartPoints system.”

Nowhere on its plan webpage does the word “weight” appear.

They can dress it up any way they want, but the fact is that “WW” is still a diet. However, by stepping away from the ideas of “diet” and “weight,” it means consumers who fail don’t walk away. It’s easier to “quit a diet” than “make a lifestyle change.” Bottom line: There’s a never-ending supply of customers in the world. People always are trying to manage their weight, and there’s no shortage of people doing this around the world. Everyone wants to be healthy and everyone wants to look good. So they go to gyms, exercise, and try weight management for long periods of time.

Health and weight management are an obsession in Western culture and that’s not going to change.

Not only that, we believe the COVID-19 quarantine is going to encourage many people to take the downtime to tackle weight management – while others will surely become couch potatoes.

WW has worked hard to reduce its long-term debt, from $2.36 billion in FY13 to $1.46 billion today. It also has $292 million of cash. Perhaps more important is the fact that WW always has generated respectable amount of free cash flow – $156 million in FY19.

Valuation

When it comes to most stocks, we look for a PEG ratio of 1.0 or less, per Peter Lynch.

The growth rate is based on the next year’s EPS as determined by analysts, which is currently 28%. At a price of $24.77 on Friday, WW stock trades at 14x FY19 earnings of $1.71 per share.

That gives WW stock a PEG ratio of only 0.50. Not only is it a value stock now, but selling naked puts means it could be put to us at an ever lower price.

Risks

The biggest risk to WW stock is competition, and boy, is there a lot of it: Paleo, keto, blood type, vegetarian, vegan, South Beach, Mediterranean, raw, low-carb, low-fat, and on and on. WW fairly represents just how competitive the market is in their 10-K:

“The purchasing decisions of weight management and healthy living consumers are highly subjective and can be influenced by many factors, such as brand image, marketing programs, cost, social media sentiment, consumer trends and perception of the efficacy of the service and product offerings. Moreover, consumers can, and frequently do, change approaches easily and at little cost. For example, fad diets and weight loss trends, such as low-carbohydrate diets, have adversely affected our revenues from time to time. Also, in recent years, our revenue was adversely affected by the popularity of mobile technology, which has led to increased trial of free mobile and other weight management apps and activity monitors. Any decrease in demand for our services and products may adversely affect our business, financial condition or results of operations.”

Weight management is highly competitive. There’s always a battle for market share and the next new thing, and WW must stay on top of its marketing and branding to maintain market share. It also must continue to innovate.

WW’s food products are made by third parties and supply chain disruptions could seriously harm its business because it’s centered around sales of those food products.

Finally, the harm done to personal income by the COVID-19 shutdown could mean dieting is put on hold as people move to cheaper options.

Actionable Conclusion

The July $22.50 puts are going for about $1.35 each. Earning more than 6% in about four weeks is an incredibly generous premium, as it usually is closer to about 2.5%.

If WW shares are put to you, you will be buying WW stock at the equivalent of $21.15 per share, which is about an 15% discount from even this low price.

For those who want to wait a little bit longer to see how the business environment shakes out, the October $22.50 puts are going for about $3.25.

If put to you, you will be buying WW stock at the equivalent of $19.25 per share, a discount of more than 22% from this already cheap price point, and you’ll own WW stock at an very low P/E of 11.

Finally, for the most conservative choice, the January $20 puts sell for about $3.35 each.

You first earn 16% on your money, and in the process you’d be hedging your WW stock bet all the way down to $16.65 per share and owning it at just 10x TTM earnings.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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