At Weight Watchers, Shrinkage Is Big Business

Yes, a stock buyback means that management believes in the company. And, yes, a big buyback shrinks the share count and boosts the earnings per share, which creates a permanent buyer in case the market shifts and the stock price starts to fall. But Cramer’s adding another benefit of a buyback – it could mean that a company is ripe for takeover.

That’s the theme for tonight’s show. Big buybacks could equal buyouts. We already covered United Stationers and Brink’s tonight, so now it’s time for Cramer’s top pick: Weight Watchers.

WTW initiated an aggressive buyback of 19% of the company’s shares outstanding and borrowed about a billion dollars to do it. The debt might make leveraged-buyout firms think twice before offering a bid, but Cramer says there are plenty of reasons to like this company, not the least of which is its tremendous free cash flows.

There’s also the great brand, the longer-term model that offers flexibility to dieters, the strong online and licensing businesses and even the core business, which is in transition right now. Weight Watchers is switching from a pay-as-you-go model to one based on a monthly pass. The stock suffered at first because the monthly payments offered initial discounts to customers, but over the long term they should help retain WTW’s membership and boost revenue. Regardless, the latest quarter put the kibosh on any doubts the Street should have about Weight Watchers, Cramer says – but, of course, that won’t stop analysts from doubting.

Cramer is confident in the company, though. His prediction is that Weight Watchers will either be bought out or take itself private, the latter happening if the Street continues to show the stock no love.

Bottom Line: Takeover or not, Weight Watchers is a great company, Cramer says. It’s his number-one big buyback pick, and he thinks it could get a bid.

Questions? Comments?