Weight Watchers International, Inc. (WTW), Life Time Fitness, Inc. (LTM): Recent Dip Provides Buying Opportunity for This Stock

Although Life Time Fitness, Inc. (NYSE:LTM) also has a stable pre-tax margin due to its ability to attract a consistent flow of customers each year, its return on assets is substantially lower than Weight Watchers’. The discrepancy is due to the nature of each company’s assets; while Life Time Fitness has to purchase large floorspace and expensive equipment, Weight Watchers operates with hardly any tangible assets. As a result, Weight Watchers International, Inc. (NYSE:WTW) can return more capital to shareholders than Life Time Fitness, which must invest a substantial portion of cash flow in order to expand.

Cheap stock

Weight Watchers trades at just 10 times trailing earnings and free cash flow. However, the company has about $2.3 billion in net debt — more than four times operating income. Weight Watchers International, Inc. (NYSE:WTW) history of stable earnings allows it to carry a heavier debt burden than most other companies would consider safe, but the company will need to pay down about one year’s operating income worth of debt in order to reach a more sustainable level. As a result, shareholders lose out on about one year’s worth of earnings.

A simple way to think about the opportunity is this: investors can buy a perpetual bond with a 10% coupon at par, but must forgo the first year’s worth of interest payments. In a market driven upward by quantitative easing, this is a pretty good deal.

Ted Cooper has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article Recent Dip Provides Buying Opportunity for This Stock originally appeared on Fool.com.

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