Weight Watchers shares plunged following the company's earnings report, particularly due to very disappointing guidance. But one analyst is holding out hope in a big way.
"This is going to be a slow-building transition, but you're going to see numbers move a lot higher," Alex Fuhrman, who covers the stock for Craig-Hallum Capital Group, said Friday on CNBC's "Power Lunch."
On Friday, Fuhrman reiterated his "buy" rating on the stock, as well as his $35 price target despite a massive decline in the name that led shares to end the week at $11.01.
In Monday trading, Weight Watchers rose about 65 cents, but that is cold comfort to those who owned the stock before its earnings report, when it was trading at $15 to $16.
Yet Furhman believes investors overreacted to the news that the company expects to lose about 20 cents a share in the first quarter on the back of yet another year-over-year revenue decline.
"That really shouldn't be unexpected to anyone," he said. "Most of the revenue you have in Q1 is from customers who joined prior to Oprah's involvement, and there frankly weren't very many of those customers then."
Fuhrman's $35 price target comes from an anticipated 14.6-times multiple on the $287.5 million earnings before interest, taxes, depreciation and amortization figure he expects to see in 2017.
For a few reasons, this number looks quite speculative.
On the EBITDA side, Fuhrman expects that the company will reverse its revenue losses — yet he bakes in the expectation that Weight Watchers will increase its gross margin substantially, and reduce the absolute level of its sales, general and administrative expenses. This is because a shift away from meetings should help the company cut costs, in the analyst's view.
As for the multiple, Fuhrman grants in his research report that 14.6 times EBITDA would represent a valuation multiple "approximately double that of peers," even as personal fitness appears to be in the midst of a strong secular shift away from an emphasis on food and toward exercise.
Furhman explains that this premium is merited partially on the strength of "significant potential for large upward revisions to our estimates over the next six months."
In other words, as the analyst learns more about the company's growth, he believes he may increase his own EBITDA estimates. The interesting thing here is that the potential for his higher-than-expected prediction isn't already reflected in his forecast, but in the "multiple" slapped on these numbers.
"You've got a lot of room for numbers to move higher as the year progresses," Furhman said.
Beyond the numbers, his main bullish case is the primary one that has been revolving around the company this year, which is that Oprah Winfrey's involvement will help Weight Watchers grow massively.
Not everyone is as bullish as Fuhrman. David Seaburg, head of equity sales trading at Cowen, said Winfrey's large stake in the company and her marketing role will not move the needle.
"Trends have changed" in the fitness space, and Winfrey won't change that, Seaburg said Friday on CNBC.
When it comes to the stock, "maybe at $10.50 I'd buy it for a trade, but there's no way I'd touch this thing from a long-term perspective at these current levels," he said.