Keep An Eye On Weight Watchers The Atkins craze has hurt, but UBS analyst Andrew McQuilling sees hefty earnings ahead.
By David Rynecki; Andrew McQuilling

(FORTUNE Magazine) – In the past, two-time FORTUNE All-Star Andrew McQuilling has given our readers well-timed tips on such out-of-favor gems as Procter & Gamble, Gillette, and Estee Lauder (the makeup giant's stock is up 20% since he picked it for us last spring). Now he's bullish on Weight Watchers International (WTW, $38). The weight-loss enterprise, which operates group help classes, has suffered through a year of belt-tightening results due in large part to the expanding popularity of low-carbohydrate alternative diets such as Atkins. We asked McQuilling to add up WTW's points for us.

--David Rynecki

Why is Weight Watchers having such a tough time?

It's Atkins. When Weight Watchers went public in 2001, it had incredible momentum. It looked like the greatest growth stock in the world. Attendance at Weight Watchers meetings in North America was growing 30%. The stock hit $50 in 2002 from an IPO price of $23 a share. It was talked about on Sex and the City. Condoleezza Rice had the whole Bush cabinet doing Weight Watchers. And then Atkins came along. Weight Watchers growth began to dissipate. Attendance started to decline. The company missed earnings expectations in the March, June, and September quarters last year.

Have you tried Atkins?

No, I'm too skinny.

What makes you think Weight Watchers will defeat Atkins?

It won't. Atkins will defeat itself. People go from fad diet to fad diet. I just met with a diet researcher who said that Atkins is now a frenzy. It will burn itself out in the next six months. The packaged-food people and fast-food places will start promoting low-carb bread more, and more people will try it. That will mean the end because they'll be so disgusted, they'll go back to their old habits.

Any signs of that happening?

Atkins hit a peak last August based on the number of low-carb books sold in the U.S. Low-carb diets as a percentage of health-and-wellness book sales went from 30% to 70%. We went from three million people to ten million people on Atkins in a year. That's a parabolic increase.

How does that help Weight Watchers?

There are three things we can always count on: death, taxes, and people's tendency to overeat. Since 1977 sales have compounded at a 13% rate. It's a profitable business that satisfies a growing market, so to speak. Weight Watchers is not a fad. It's the perfect business. It's as if it sells air. The company has a 40% return on invested capital. People pay a fee to join and then pay to attend meetings.

Is the stock a bargain?

Yes. Expectations for profits are low. The market is anticipating low single-digit attendance growth. Any improvement should help the stock. I figure by March or June, Weight Watchers will get the first wave of Atkins refugees. Check out the company's earnings on Feb. 23. That will be the first indication of where the year is headed.