The Long:
12-month target : $22.50
Can Oprah Winfrey's mere presence reverse a decaying dinosaur of a business? Can she reverse a fundamental downtrend years in the making? Of course she can, we are taking about Oprah, whose endorsement has influenced presidential elections, created brands, best sellers and self-help mega stars that have become brands themselves.
Has the move been made? The stock is up over 100 % since the announcement of Oprah's stake in the company. I strongly believe there is more upside to come. Oprah's lock up in Weight Watchers (WTW) ends in fuve years. Sure, it is a competitive field, with many other options at lower price points and offering more convenience. Also, Oprah may be past her prime, with an aging audience and no daily TV show.
Consider the following: Oprah in 2011 had over 48 million viewers, 59 of 70 books she endorsed became national bestsellers and even today her eponymous OWN is carried in over 80 million homes nationally and today, she still pulls in 300,000 viewers per night and 150,000 at day.
It is nearly a given that Weight Watchers will shortly launch a social media driven online version of the classic in person version. The average spend annually is now $377. We assume a price point at a 50% discount for an online product or approx. $200 annually. We are talking about a huge market in the U.S. Where over 30% of the population is clinically obese, a national tragedy of pandemic proportions! Image the savings to the national health bill.
Here is the math: if Oprah can reach 10% of her 48 million that is about 5 million new customers at $200 per year with a 20% net margin to Weight Watchers, or about 3.33 in additional eps . Add that to street estimates of .67 for 2015 and this renders about $4 per share in earnings. Now let's take a more conservative assumption of 5% conversion in 5 years and discount it at 12% annual rate for high risk. This will render about $1.50 in present value EPS and if we use a conservative PE of 15, we can see a $22.50 target price in the next 12-18 months.
The Short:
12-month target price: $82
Take an enormous amount of leverage and buy out branded consumer staple core drugs that treat dermatology and ophthalmology, slash R&D, mix in a couple specialty drugs that are smaller but have limited competition, jack up prices and then domicile it all in tax havens for corporations like Canada or Ireland. It worked for Valeant but now the company is leveraged to the gills and can't make any acquisitions for a while, Congress is closing off tax inversions and investigating abusive price increases on specialty treatments, investors are wondering about true organic growth, and shorts are circling like buzzards.
In fact, on a special call to appease investors recently, Valeant management revealed that nearly all its organic growth was been driven by variable investment entities engaged in specialty mail order pharma sales.
Valeant investors thinking they owned a new pharma trophy growth stock are discovering an inconvenient possibility, that they own a no or slow growth, highly leveraged portfolio of overpriced and aging drugs.
Soon investors will see through Valeant’s aggressive vendor financing, insurance coverage strategy and close off this final avenue of revenue growth and then this highly leveraged, slow to no growth company with a portfolio of stale remedies, will trade like a junk bond. We cap trailing twelve months of EBITDA at $5.3 billion, reported as of Sept 30, 2015. Then we subtract interest costs of $1.5 billion which provides funds from operations of approximately $2.8 billion, priced at 10 % yield equates to our $82 price target.
.
Disclosure: Maltbie’s firm currently has no position in Weight Watchers International, and is short Valeant Pharmaceuticals International.
