Oprah Is Now A Shareholders In Weight Watchers

Weight Watchers has been on all of my value screens over the last two years. Earlier on Monday it was announced that Oprah had taken a 10% stake in Weight Watchers and joined the board of directors. She will be unable to sell a single share for two years and will have to wait five years to fully sell her stake. After Weight Watchers announced Oprah's stake in the company, shares rose from $6.20 to over $12.00/share, a 50% increase on the news. The market and investors are reacting very well to the news. However, Weight Watchers may appear to be cheap but  its may not be cheap at all. Oprah's stake in the company doesn't change the company's underlining economics.

Sometime companies who appear on value screeners are "value traps".
You are probably asking your self what a value trap is? Well, its a company that appears to be cheap but its value continues to decline. An easy way to spot a value trap is to look for long-term profit margin declining. Weight Watchers appears to be cheap, but it has continued to see it underlining economics deteriorate.

As the company's profit margins deteriorated, so did the company's revenues and earnings.Investors had plenty of time to sell out of Weight Watchers before it entered into the final stages of a value trap. The best indicator for a value trap is the long-term decline in profit margins. Weight Watchers has seen its free cash flow eaten up by interest expenses. The company has also increased its capex spending to $62 million from $31 million a few years ago. Oprah's investment in the company has led to Weight Watchers shares skyrocketing over 100% in a single day. Shares now trade for $17/share.

Oprah is a smart and quite powerful woman who is worth $2 plus billion dollars. However, the problem is that Weight Watchers are far more difficult to be resolved by Oprah making ads and sitting on the board. She will be able to buy an additional 5% of the company at a fixed price of $6.97/share. Oprah's stake in the company will be locked up for at least two years, and afterwards she may sell 15% of her stake in the third years, and 30% in the fourth year. She must wait a full five years until she can fully divest herself of the company.
Published on Oct 27, 2015
By Cody Eustice
Cody is a freelance writer who has been writing financial articles for various sites for over a year now. He is a value investor looking for companies that sell for far less than their estimated business value.

Copyrighted 2020. Content published with author's permission.

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