Oprah’s influence gives Weight Watchers a boost

Three weeks ago, Oprah Winfrey turned around the fortunes of Weight Watchers International (WTW) by purchasing a $43.2 million, or 10 percent, equity stake in the company. She also joined its Board of Directors in an effort to bring her insights to future products and programs.

The move was not lost on Wall Street, and the shares increased in price accordingly. So should you consider an investment in Weight Watchers? My opinion is mixed.

On Nov. 5, Weight Watchers announced its results for the third quarter that ended Oct. 3. Revenues were $273.3 million, down 20.8 percent when compared to the prior year. Earnings per share were $0.38, excluding the $0.01 per share impact of restructuring charges. However, the company is raising its full year fiscal 2015 earnings guidance to between $0.64 and $0.74 per share on an adjusted basis.

Shortly after the Winfrey announcement, billionaire Steve Cohen said in a filing with the Securities & Exchange Commission that his family office, Point72 Asset Management, had recently acquired a 6 percent stake.

Federal prosecutors in Manhattan accused the firm of insider trading. Although Cohen was never charged with any wrongdoing, SAC Capital, pleaded guilty to various trading violations and agreed to pay $1.8 billion in penalties.

Shortly thereafter Cohen closed SAC and now trades his vast fortune through his family office, no longer managing money for others. With an estimated $12 billion fortune, he remains a large and closely watched Wall Street investor.

In addition to making a large financial bet on the company, Winfrey has signed a collaboration deal to promote Weight Watchers and its services, which includes an option agreement allowing her to acquire 3.5 million shares at a price of $6.79 each.

Her move into Weight Watchers has crushed a large number of short sellers who had been betting the stock would fall. Weight Watchers had a short interest of 11.6 percent of its shares outstanding prior to Winfrey's deal. Short sellers who hung around and bet that the Winfrey pop would fade have been disappointed.

Can Winfrey’s mere presence reverse a decaying dinosaur of a business? Can she reverse a fundamental downtrend years in the making? The answer could easily be yes.

Note that the intrinsic value of the shares using a free cash flow to the firm model is $125 per share. The shares recently closed at $23.21. My 2016 earnings projection is for $1.00 per share, with a 12-month estimated share price of $26.

Lauren Rudd is a financial writer and columnist.