Weight Watchers Soars, But These Analysts Remain On The Sidelines

Weight Watchers International, Inc. WTW soared 40% on Wednesday after reporting impressive second-quarter results, but two analysts are hesitant in recommending investors buy shares.

The Analysts

Morgan Stanley's Brian Nowak maintains an Equal-Weight rating on Weight Watchers with a price target lifted from $23 to $25.

KeyBanc Capital Markets' Edward Yruma maintains at Sector Weight.

Morgan Stanley: Impressive Steps But Further Signs Needed

WW, as it is known now, reported second quarter EBITDA 16% above expectations as cost cutting initiatives flowed to the profit line, Nowak wrote in a note. The company also delivered gross margins and gross profits ahead of expectations, mostly from cost rationalizations.

See Also: Large Option Trades In Weight Watchers Ahead Of Earnings

Nowak said the company continues to take the right steps in improving personalization with users and data-driven targeting efforts. Over time, this should result in notable improvements to subscriber acquisitions.

However, WW's subscriber count at the end of the quarter of 4.6 million was consistent with expectations while revenue fell short of consensus estimates by 2%. As such, management needs to demonstrate signs that 2020 will be a year of re-acceleration after a difficult start to 2019.

KeyBanc: 'Modern Voice' But Valuation Concerns

WW's second quarter shows the company is now reaching out to customers with a "more modern voice," including a refresh of the studio experience and new packaged goods products, Yruma wrote in a note. The launch of a new program next year adds to the encouraging narrative and a continued focus on highlighting the health benefits will be well received.

Despite improving retention rends in the quarter and revenue tailwinds in 2020 from new initiatives, shares of WW are trading at a "fair" valuation of 8.4 times 2019 EV/EBITDA. Nevertheless, a "positive bias" is warranted after the company showed improving results in its earnings release.

Price Action

Shares of WW gained around 40% at time of publication, trading around $29.46.