Weight Watchers (WTW) narrowly beat fourth-quarter earnings estimates and fell short of sales estimates on Tuesday. Pretty ho-hum earnings results, right? Not in the eyes of Wall Street. Weight Watchers’ stock price jumped from 13 to 18, a 40% boost, in 24 hours. In fact, since the beginning of the week, WTW’s share price has improved by more than 50%!
How did it happen?
Investors focused on some of the other encouraging numbers reported by the Oprah Winfrey-backed company. Those included:
- A 10% increase in membership, to 2.6 million customers, marking a fourth straight quarter of growth after years of declines.
- It raised its 2017 full-year EPS guidance to a range of $1.30 to $1.40, well ahead of the $1.17 analyst estimates.
- Fourth-quarter EPS came in at $0.20 (analysts were expecting $0.18), a complete turnaround from the $0.18-per-share loss in the fourth quarter a year ago.
- Despite falling just short of estimates, Weight Watchers’ sales did improve 3% year over year—just the second quarterly revenue increase in the last three years.
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Also helping the huge jump in Weight Watchers’ stock price was its rather cheap valuation. As of this writing, it still traded at a mere 12.5 times forward earnings estimates. And prior to the big post-earnings gap up, it was trading closer to 52-week lows (high 9s) than its 52-week highs (high 15s). In one fell swoop, it blew past those highs.
The big gap in WTW stock is a testament to the escalating importance of earnings. As Mike Cintolo, our resident expert on growth investing and market patterns, wrote recently, “Earnings season has become a make-or-break time for many companies.”
Of course, that doesn’t mean you should try to guess which stocks are going make big earnings-related moves. “It’s all pretty random,” as Mike wrote. But once a stock like WTW does make a big earnings-related gap up, it’s worth your consideration as an investor based solely on the momentum in the chart.
Case in point: if you’re a growth investor or trader, Weight Watchers stock looks like a solid buy on dips, once it inevitably comes back to earth following this post-earnings feeding frenzy. One full year of membership increases is encouraging, and the return to earnings growth is a sign that management might be figuring things out—even though it technically doesn’t have a manager at present following the September resignation of CEO Jim Chambers. Nevertheless, the current growth trajectory bodes well for WTW stock going forward.
But 40% earnings jumps are extremely rare. They require almost a perfect storm of better-than-expected results, great guidance, a cheap stock and a bull market. Fortunately for Weight Watchers, it had all of those things going for it. Still, the ensuing explosion in Weight Watchers’ stock price was shocking—so you shouldn’t waste your time trying to find the next Weight Watchers!
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