MED - Medifast Share Price Loses Weight But Is There Still Value To Be Had?

2024-01-20 04:36:45 ET

Summary

• Medifast is a weight loss and wellness program that has experienced a significant decrease in market cap and revenue in 2023.
• The company's business model relies on recruiting coaches to sell their program and products, which has been successful in generating revenue and dividends for investors.
• However, there are risks associated with supply disruption, market volatility, reputation, and government regulation that could impact the company's future performance.

If you were looking at medium-to-small companies trading around a 52-week low but with some favorable numbers behind them, it won’t take long and you’ll eventually come across Medifast (MED), the weight loss and wellness program that sells nutritional products.

The market cap was chopped nearly in half in the past 52 weeks, and as you’ll see, 2023 has been a rough, rough year, seeing revenue down markedly from the years prior. The question then has to become, is there anything left that an investor might find remotely appealing?

Understanding Medifast

Medifast styles itself as one of the fastest growing health and wellness companies in the world. Centered around the Optavia program, they are quick to say the program is rating number one in the United States on the basis of revenue.

But how do they make money? The secret is the coaches. The company recruits coaches who have had success with their program, and sells them a “business kit” to go into business for themselves, selling the program to new customers and also pushing the Optavia nutritional products on them. It makes them money, and makes the company money.

In my opinion, that seems like a questionable business model, and it's hard to imagine people buying into it. Yet the proof is in the pudding, and for years the company has been making a lot of money, and paying investors big dividends for their trouble.

Steadily rising year after year, the company in 2023 paid $1.65 every quarter, putting the current yield, at the lower share price, at 11.95%. That’s huge, and if there is value to be had in Medifast, it is in its role as an income stock.

By the Numbers

(source: 10-Q from SEC)

As you can see, Medifast is sitting on a fair bit of cash on hand. That and the low debt/equity ratio shows a company that is responsibly financed, and with a current ratio above 2.0, they are able to cover up a lot of woes with this balance sheet.

Unfortunately, even after the share price took a relative haircut, it is still trading at a fairly high premium to the book value. That is a knock to the argument for a deep discount value play, but the yield and the P/E ratio (more on that later) are still strongly in favor of it.

Justifying paying a premium to book would need to be built on something like growth. A case could be made from 2021-2022 that we were still seeing growth in the company, but 2023 was again, rough by comparison. The big question is if it was an aberration or a general trend downward.

The Risks

When looking at a company that has been beaten up like Medifast, we need to ask not only what went wrong, but what else might go wrong in the future. Sadly, the company is replete with risks.

As with a lot of companies struggling right now, the issue of supply disruption is looming large. Medifast for the most part doesn’t make its own products, but outsources them, and the shipment woes are impacting them like everyone else.

On top of that, market volatility is a big factor in what’s already gone wrong. People still want to lose weight, and that’s working in their favor, but with inflation and general rise in the cost of living, this isn’t necessarily a priority for them in the near-term.

A risk worth noting is reputation. Making coaches into their own mini-businesses means them using advertising and social media to get the word out. If they are inappropriate or rude on those platforms, however, it risks reflecting badly on Medifast itself.

Finally there’s the biggest risk of all, government regulation. Medifast has already been hit by fines from the FTC for misleading advertising , and it came with a promise to make sure future claims of success are backed by at least some human trials.

But while that was over a decade ago, we don’t know that this is truly the end of government crackdowns on the company. Medifast has some awkward things about their business model, particularly with respect to the qualifications of coaches, and could always be ripe for another case against them. If that happens, it could both harm the reputation and do serious further damage to their operations.

Growth Until FY2023

(source: 10-K and 10-Q from SEC)

As you can see, the 2021-2022 trend was mostly very positive, and if one takes only that into account, we have a good value candidate showing modest growth and a nice yield. Unfortunately, there is then FY2023, at least the first nine months of it, to consider.

2023 has been a major struggle for the company, with revenue way down, and net income way down. Now, it must be noted that this is already baked some into the price of the stock from the decline, but if it keeps happening going forward, it could be an ominous sign of things to come.

But even then, with only 10.9 million shares or so outstanding as of the most recent 10-Q, that net income amounts to a diluted EPS of $8.50 and change, and gives us a PE ratio of 6.08. That tells me that even as a company operating smaller, they are bringing in the earnings. So long as that continues and they don’t shrink any further, they are definitely a value candidate.

(source: 10-K and 10-Q from SEC)

Free cash flow from operations remains a strong point, and if there is one thing Medifast can do, whatever else you want to say about them, they can bring in some major cash. In FY2023, the company managed to keep the losses of cash on investment and financing to a modest level, and all told they still booked a net gain of cash on hand, important if they are to maintain the dividend payout investors have come to expect.

Conclusion

Medifast is either a diamond in the rough, or just plain rough. If we could count on the dividend yield and the earnings per share to stay where they are, it would be absolutely foolish not to consider it a fair price, and a return to 2022 levels could make for exciting returns.

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That said, it’s not 2022 anymore, and the seasonal nature of the business means all the best profits were already made in Q1 for 2023, leaving them finishing out what is honestly a forgettable fiscal year.

Are they worth a value play? Maybe, but I’d be awfully leery unless I see signs of a turnaround, or at least of things not getting precipitously worse. If the dividend payout is not threatened, and they say they intend to keep paying it, it might be worth a flier on a small number of shares, but definitely not a huge holding in any portfolio.

Personally, I’m going to wait and watch. Medifast has proven over the years that there is money to be made, but the state of the business and the real risks associated with it tell me that even the 52-week low might have more of a decline to go through. If that happens, I might consider buying some, but until then, I have to rate this stock as a clear-cut hold. I wouldn’t be headed for the hills over what’s happened, but if it’s a buy, it’s a “buy only if.”

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