Weight Watchers shares skyrocketed this morning after the company announced that Oprah Winfrey has taken a stake and joined the company’s board of directors. Interestingly, Weight Watchers is quite a popular short position, as it landed on Goldman Sachs’ list of the top 50 stocks under $1 billion with the biggest short interest as a percentage of market capitalization.
A short squeeze on Weight Watchers?
In fact, as of the end of September, 15.7 million shares of the company were sold short, and the number of days to cover was 14.3. The percentage of the float that’s sold short varies quite widely from source to source. However, we can say that it’s so high that part of the reason of the sudden increase in share price could be due to short covering. As of this writing, shares of Weight Watchers were up 97.78% at $13.09 per share and still rising.
JPMorgan analyst John Faucher and his team also noted the likelihood of a short squeeze in Weight Watchers shares. They remain Neutral-weighted on the company and noted that the Winfrey news would likely move shares much higher, as it did. JPMorgan estimates that 57% of the float is sold short.
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Weight Watchers needs a turnaround
Faucher says Weight Watchers isn’t “out of the woods” yet, although the partnership with Winfrey is an indication that management wants to turn things around. He said the burden is now on management to demonstrate that they really can turn things around at the company. He noted that this year would be the third consecutive year Weight Watchers’ top line is under pressure and the second year with declines in the double digits.
The JPMorgan team noted that in the second quarter, company management seemed “more upbeat” compared to recent history on the sequential recruitment trend improvements. The trend is still down year over year but has reached the highest level since the fourth quarter of 2012. Faucher wants to see more details on Winfrey’s involvement before becoming more constructive on Weight Watchers.
Oprah Winfrey’s involvement a “game changer”
Winfrey shelled out $43 million for a 10% stake in Weight Watchers and options to purchase another 5% stake at $6.79. She also joins the company’s board and becomes an adviser and member of Weight Watchers. The company remains a controlled company, as Winfrey has entered into a voting agreement with 52% stakeholder Artal to act as a group.
Morgan Stanley analyst Dara Mohsenian and team call her involvement a “game changer” for the company, although they want to hear more details before they will upgrade the stock. They currently have an Equal-weight rating on Weight Watchers. They expect Winfrey to “contribute meaningfully” through her endorsement and by helping increase the company’s media exposure through her various outlets.
Weight Watchers’ upcoming program might help
Weight Watchers also is launching a new program, calling it “one of the most significant and comprehensive program innovations” in its history. Mohsenian noted that these programs in the past have not successfully driven a “sustained topline turnaround,” but the marketing program with Jennifer Hudson and Points Plus did drive short term growth improvements.
The Morgan Stanley team expects Winfrey’s pull to yield results that are more outsized than past programs because of her extended global reach and expectations of staying involved in the long term. Winfrey is also far more popular than Hudson with 29.3 million followers on Twitter to Hudson’s 3.8 million. Winfrey’s O Magazine has 2.4 million subscribers, and her website, Oprah.com, averages over 70 million page views and over 6 million users a month.
Craig-Hallum Capital doubles price target
Analyst Alex Fuhrman of Craig-Hallum Capital Group has doubled his price target for Weight Watchers in light of Oprah Winfrey’s involvement from $10 to $20 per share. He maintained his Buy rating on the company and noted that Winfrey has already appeared on the company’s website. He expects revenue growth to become positive next year, which would inflate his current estimate for EBITDA by between $30 million and $40 million or possibly more.
Report of activist involvement appears false
Interestingly, we heard rumors of an activist hedge fund getting involved in Weight Watchers in July, but those rumors never turned into anything substantial. Supposedly an unnamed activist hedge fund had bought the majority of the company’s $144 million in senior loans due in April. Including that debt, the unnamed fund’s stake was said to be nearly $2 billion.
Further, the fund was said to have been negotiating with possible partners to make an offer for Weight Watchers—something else that never came to pass.