Someone sent me an email asking:
What led to the Weight Watchers purchase?
Obviously, the 20% price drop is what directly lead to the Weight Watchers purchase. The real question is: Why had I already researched the stock and decided to buy the moment I saw the price drop?
Quan – who writes the blog with me, and who I always talk ideas with – already owns WTW. It’s his favorite stock.
What got me thinking about WTW originally was the history of share buybacks. You’ve probably heard Mohnish Pabrai say that Charlie Munger told him about “cannibals” – companies that eat their own share count. I screen for them.
From there, my thinking was:
How I framed it:
Under normal circumstances, I saw no justification for a price below $52 a share. This is 15 times what I expect reported earnings would be in 2017 ($3.50 a share ). Free cash flow would be higher than EPS. That’s a 10% return over 3 years. I could live with that.
Do I think they will produce zero free cash flow for 3 years?
Do I think they will buy back zero shares for 3 years?
Do I think it will take a full 3 years for sentiment to turn?
Therefore, I felt the upside was somewhere between 10% a year and a lot. The cost of getting a chance at the “a lot” is 3 years of volatile discomfort.
In my experience, it rarely takes 3 years. But I always tell myself it will.
What could derail this?
Both are possible when you owe more than 4 years of EBITDA – and you expect EBITDA to decline – as WTW does.
The debt is a big risk. If the market cap was the same and there was no debt, I would have bought this stock a long time ago.
We are not talking about a low EV/EBITDA stock here. WTW is not a value stock.