Medifast (MED, Financial) is a mission-driven company supporting health and well-being, helping its customers transform their lives by providing healthy living products and programs. The company has developed the OPTAVIA brand that offers healthy products and support from experts in science, health and wellness so that customers achieve a transformation in their lives focusing on healthy habits over time.
The company has built a fast-growing health and wellness community, but its shares have been a laggard year-to-date, posting losses of nearly 29%. However, I would argue that this presents an attractive value opportunity as the fundamentals are quite strong, the balance sheet is in good shape and the company is set to benefit from growth in two key markets according to management.
The fundamentals look good, but slow growth raises concerns
Medifast announced its first quarter 2023 financial results back in early May and there was mostly good news. The GAAP earnings per share of $3.67 beat analysts' estimates by $1.27, and revenue of $348.98 million beat estimates by $29.48 million. Under normal circumstances, expectations of a price rally would be justified. Better than expected profitability and sales are normally a good sign, so why has the stock lost nearly 10% over the past month?
The short answer is lack of long-term growth. Despite the better than expected results, the first-quarter 2023 revenue declined 16% compared to revenue of $417.6 million for the first quarter of 2022, gross profit decreased 18.5% to $246.4 million compared to $302.3 million for the first quarter of 2022 and income from operations fell 2.9% to $53.5 million compared to $55.1 million in the prior-year period. The decline in revenue is shown in the chart below:
Moving on to positive news, the management of Medifast claims it has identified the main problem related to growth and is taking steps to address it. Dan Chard, Medifast's Chairman and CEO, commented the following on the first-quarter 2023 financial results:
"Sustainable long-term growth is at the core of our focus, and we are undertaking a number of initiatives to return the business to a growth trajectory. In addition to working to increase customer acquisition, we are implementing strategies that will expand our addressable market, as we target new demographic segments, geographies, and adjacent categories.”
If the company finds a way to solve this slowing revenue problem, I believe the chances of a stock price rebound are very high.
A robust balance sheet and strong fundamentals along with a cheap valuation are key catalysts
Medifast has a very strong balance sheet as it reported it had no interest-bearing debt as of March 31, 2023. There was also an increase in cash and cash equivalents to $123.7 million compared to $87.7 million in cash and cash equivalents as of Dec. 31, 2022.
The profitability is exceptionally strong as the return on equity currently stands at 93.73% and has been rising over time, while the return on assets is at 43.52%, which is impressive. The company has generated positive free cash flow over the past five years, and for 2022 there was a huge free cash flow increase of 194.83% to $177.89 million.
The forward dividend of $6.60 gives a yield of 8.27%, which is incredible. Medifast has been increasing its dividend since 2017.
In terms of valuation, when looking at Wall Street's average analyst estimates, Medifast has a forward enterprise-value-to-sales ratio of 0.68, a forward price-sales ratio of 0.76 and a forward price-earnings ratio of 10.30.
Strong outlook for momentum of key segments
In addition, another factor highly beneficial for Medifast is the growth expected in two key markets. Medifast operates first in the personal services market. According to Medifast, “The market is expected to reach $1721.52 billion in 2026 at a CAGR of 10.2%. According to the personal services market analysis, the market's growth is expected to be aided by stable economic growth forecast in many developed and developing countries.”
Second, Medifast also operates in the global weight loss and weight management market. According to the company's recent report, “As per the analysis, the weight loss and weight management market share is likely to grow above a CAGR of around 6.84% between 2022 and 2030. The Weight Loss and Weight Management market size was worth around US$ 224.27 billion in 2021 and is estimated to hit approximately US$ 405.4 billion by 2030. Due to a variety of driving factors, the market is predicted to rise at a significant rate. The market is projected to grow at a significant rate due to the growing obesity rate in the world.”
My take
The anemic growth in recent years is my main concern with the company, but I believe the stock has more positive catalysts than negative, including an attractive valuation, a strong balance sheet and strong profitability. It also operates in markets with bright prospects. A return to revenue growth could mark a turnaround in the stock's popularity.
