MED Stock Study (10-9-23)

Posted by Mark on December 15, 2023 at 06:17 | Last modified: October 9, 2023 15:20

I recently did a stock study on Medifast, Inc. (MED) with a closing price of $73.87. Previous studies are here and here.

M* writes:

     > Medifast Inc is a US-based company that produces, distributes
     > and sells products concerning weight loss, weight management,
     > and healthy living. The company generates its revenue from
     > point of sale transactions executed over an e-commerce platform
     > for weight loss, weight management, and other consumable
     > health and nutritional products.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 23.5% and 32.4%, respectively. Lines are mostly up, straight, and parallel except for a 2-3-year dip between ’13 and ’16 and EPS in ’22. PTPM trails peers and [slightly] industry averages by increasing from 9.6% (’13) to 11.5% (’22) with a last-5-year mean of 13.4%.

Also over the past decade, ROE leads peer and industry averages by increasing from 20.4% (’13) to an eye-popping 92.0% (’22) with a last-5-year mean of 72.8%. The company has zero long-term debt. That means Debt-to-Capital [as uncapitalized leases] is far below peer and industry averages with a last-5-year mean of 9.3%.

Quick Ratio is 1.3 and Value Line gives a Financial Strength rating of A.

With regard to sales growth:

• CNN Business projects contraction of 25.0% YOY and 13.4% per year for ’22-’24 (based on one analyst).
• YF projects YOY contraction of 32.3% and 13.6% for ’23 and ’24, respectively (one analyst).
• Zacks projects YOY contraction of 32.6% and 18.8% for ’23 and ’24, respectively (1).
• Value Line projects 5.6% annualized contraction from ’22-’27.
• CFRA projects contraction of 32.3% YOY and 23.5% per year for ’23 and ’22-’24, respectively (1).

I am forecasting below the single long-term estimate at 6.0% contraction per year.

With regard to EPS growth:

• CNN Business projects contraction of 45.2% YOY and 21.7% per year for ’23 and ’22-’24, respectively (based on one analyst), along with 5-year annualized growth of 20.0%.
• MarketWatch projects contraction of 35.2% YOY and 23.7% per year for ’23 and ’22-’24, respectively (one analyst).
• Nasdaq.com projects contraction of 13.3% YOY and 4.8% per year for ’24 and ’23-’25, respectively [2, 2, and 1 analyst(s) for ’23, ’24, and ’25].
• YF projects YOY contraction of 37.7% and 10.1% for ’23 and ’24 (1) along with 5-year annualized growth of 20.0%.
• Zacks projects YOY contraction of 39.5% and 13.3% for ’23 and ’24, respectively (2).
• Value Line projects annualized contraction of 6.7% from ’22-’27.
• CFRA projects contraction of 33.6% YOY and 22.7% per year for ’23 and ’22-’24, respectively (1).

This is about as scant as analyst coverage can be, which makes a long-term forecast difficult. I basically have -6.7% and +20.0%. The former is possibly duplicated (both actually show as 20.00%) and both are only one analyst. Surprisingly, the negative estimate is Value Line, which predicts 90-185% stock appreciation over the next five years.

With EPS popping 60.0% YOY in ’21, I will [arbitrarily] select $6.43/share from 2019 to be low EPS. My -6.0% forecast growth rate amounts to a high EPS of $12.73/share * (0.94 ^ 5) = $9.34/share.

My Forecast High P/E is 16.0. Over the past decade, high P/E ranges from 17.0 in ’13 to 32.7 in ’17 (56.5 outlier in ’18 excluded) with a last-5-year mean (excluding the outlier) of 22.6 and a last-5-year-mean average P/E of 16.4. I am forecasting below the range.

My Forecast Low P/E is 9.0. Over the past decade, low P/E ranges from 5.6 in ’20 to 18.2 in ’16 with a last-5-year mean of 10.1. I am forecasting near the bottom of the range [only ’20 and ’22 (7.5) are lower].

My Low Stock Price Forecast (LSPF) of $57.90 is default based on $6.43/share. This is 21.6% less than the previous closing price and 17.9% less than the 52-week low. $57.90 is a stock price not seen since 2020.

After dividend inception in ’15, Payout Ratio ranges from 40.9% in ’21 to 71.8% in ’16 with a last-5-year mean of 48.9%. I am forecasting conservatively at 30.0%.

These inputs land MED in the BUY zone with a U/D ratio of 4.7. Total Annualized Return (TAR) is 17.0%.

PAR (using Forecast Average—not High—P/E) of 12.0% is decent for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 138 studies (my study and 42 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 11.5%, 10.5%, 22.0, 11.6, and 50.4%, respectively. I am lower across the board. Value Line’s projected average P/E of 20.0 is higher than MS (15.8) and much higher than mine (12.5).

MS high / low EPS are $20.98 / $11.74 versus my $9.34 / $6.43 (per share). My high EPS is lower due to a lower growth rate. Despite projecting substantial stock appreciation, even Value Line’s $9.00 [high EPS] is lower than mine.

MS LSPF of $92.80—invalid on today’s date—implies a Forecast Low P/E of 7.9: less than the above-stated 11.6. MS LSPF is 31.9% less than the default $11.74/share * 11.6 = $136.18 (also invalid on today’s date), which results in more conservative zoning. MS LSPF is 60.3% greater than mine.

My TAR (over 15.0% preferred) is much less than the 42.5% from MS. Although the latter seems too good to be true, MOS seems robust in the current study.

I track a few different [usually conflicting] valuation metrics. PEG is not available since Zacks has no long-term estimate and my negative growth rate results in a negative number. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is extremely low at 0.4. Kim Butcher’s “quick and dirty DCF” prices the stock at 18.0 * [$10.10 – ($7.15 + $0.90)] = $36.90, which suggests the stock to be 100.2% overvalued (the high dividend cuts significantly into cash flow).

MED is a BUY under $78 while meeting my TAR criterion right now.

Although the stock seems like a great buy, I am concerned for the future. I have a very low forecast P/E range and very low forecast EPS numbers for a company has historically been good quality. Looking ahead, sparse analyst estimates project a multi-year pullback—not just the next 12-24 months.

Also giving me pause is Medifast’s multi-level-marketing (MLM) business model. Some refer to MLMs as “pyramid schemes” because many have been fraudulent in the past. This is not always the case. Examples of long-standing MLM companies include Amway, Herbalife, Tupperware, Avon, and Mary Kay.

My final objection is the Medifast diet itself. Based on one article, I’m not sure the weight loss is sustainable because the food intake is so low. As a single article written by nutritionists trying to sell their own services, I must take that opinion with a “grain of salt.” Besides, MED has sold well in the past. Whether it will sell well again in the future is the big mystery.