Shares of WW, the company previously known as Weight Watchers International, jumped in morning trading after an analyst at JP Morgan upgraded the stock to Neutral and raised her price target to $22, saying that the company's subscriber trends have "stabilized." "We believe investors are beginning to look past the expected ~50% earnings decline this year," the analyst said.
WW UPPED TO NEUTRAL: JPMorgan analyst Christina Brathwaite upgraded WW to Neutral from Underweight on Thursday. The analyst also raised her price target for the shares to $22 from $17. In a research note to investors, Brathwaite said the company's subscriber trends have "stabilized," which is which is supportive of its ability to reach 2019 guidance.
The analyst also said she believes investors are beginning to look past the expected ~50% earnings decline this year and focusing on WW's potential growth opportunity in 2020 following the launch of a new diet program at the end of 2019. The analyst noted that WW management has not yet told clearly informed shareholders of the changes planned for the new diet program, other than assurances that it will be "based on the latest food science and will likely feature some aspect of personalization." Brathwaite believes the new program will help fuel recruitment and earnings growth in 2020, but noted that upside may be limited by the "intense" competitive environment, pointing out the round of additional funding competitor Noom raised in May, which will enable it to invest aggressively behind marketing. She also sees the escalation of free app alternatives continuing to limit WW's subscriber potential in the long-term.
However, despite the competition, she views 2019 as "likely feasible" due to marketing improvements helping to stabilize subscriber trends, the relaunching of TV advertising this fall and fewer promotional headwinds in the second half of the year. Brathwaite thinks the stock's risk/reward is now more balanced.
WHAT'S NOTABLE: In May, Brathwaite removed WW from her firm's Focus List as a short idea after the company's first quarter results, saying that the company was showing some signs of improvement and that the shares will be supported in the near term by hopes this trend can continue. With that said, the analyst said she continues to see risk to WW's second half of the year-weighted sales growth guidance.
The analyst previously downgraded WW to Underweight from Neutral in February, saying that channel checks indicated that WW app daily active users contracted in the most important period of the year. Further, WW app reviews have become increasingly negative since fall of 2018, with users complaining of significant technical issues, Brathwaite added, also pointing to competition from Noom and Diet Doctor, which continued to gain traffic share.
MOVES TO OFFSET COMPETITION: Weight Watchers announced its name change to WW in September 2018 to reflect its mission to move beyond weight loss into wellness with a new tagline of "Wellness That Works." At the time, Chief Executive Officer Mindy Grossman said, "We are committed to always being the best weight management program on the planet, but now we’re putting our decades of knowledge and expertise in behavioral science to work for an even greater mission. We are becoming the world’s partner in wellness. No matter what your goal is — to lose weight, eat healthier, move more, develop a positive mind-set, or all of the above -- we will deliver science-based solutions that fit into people’s lives. This is just the beginning of our journey to become the world’s partner in wellness."
The move was intended to fend off competition from direct subscription-based weight loss companies as well as free app alternatives. Noom, one such competitor that is a mobile app weight loss program, Braithwaite said earlier this year, which includes enhanced personalization by assigning each member a "health coach" who answers questions, provides tips, and helps keep members on track towards goals.
PRICE ACTION: In morning trading, shares of WW are up nearly 6% to $23.14. On February 19, when Brathwaite had downgraded WW to Underweight from Neutral initially, the stock closed at $28.91.
Keywords: analyst, analyst commentary, upgrade, weight loss, Weight Watchers, Noom, Diet Doctor