MED Stock Study (6-7-24)

Posted by Mark on July 18, 2024 at 06:53 | Last modified: June 10, 2024 13:30

I recently did a stock study on Medifast, Inc. (MED) with a closing price of $21.85. Previous studies are here, 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.

The stock is a fallen angel. It fails visual inspection as a complete trainwreck. At the time of my study eight months ago, the stock was at $73.87 and landed in the BUY zone using my growth estimate of -6% (yes, negative) for both sales and earnings. That investment obviously would not have fared well.

I am doing this First Cut to see what the view looks like from the other side (once a winner has turned into a loser).

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 24.8% and 31.6%, respectively. Lines are mostly up, straight, and parallel through ’21 except for sales in ’15 and EPS in ’15 and ’16. Sales reverse lower in ’23 and YOY EPS has been negative for the last two.

Over the past decade, PTPM trails peer averages and the industry [slightly] while ranging from 9.9% in ’16 to 14.4% in ’20 with a last-5-year mean of 13.0%. ROE leads peer and industry averages by increasing from 24.1% (’14) to an eye-popping 92.0% (’22) before dipping to 51.4% in ’23 for a last-5-year mean of 73.3%. 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 11.2%.

Quick Ratio is 2.0 and Value Line gives a Financial Strength rating of B+.

With regard to sales growth:

• YF projects YOY contraction of 38.5% and 0.6% for ’24 and ’25, respectively (based on 2 analysts).
• Zacks projects YOY 38.8% contraction for ’24 and 2.4% growth for ’25 (1 analyst).
• Value Line projects 1.4% annualized contraction from ’23-’28.
• CFRA projects contraction of 39.7% YOY and 21.4% per year for ’24 and ’23-’25, respectively (2).

I am forecasting below the long-term estimate at 3.0% contraction per year.

With regard to EPS growth:

• MarketWatch projects contraction of 79.6% YOY and 42.7% per year for ’24 and ’23-’25 (based on 2 analysts).
• Nasdaq.com projects growth of 116% YOY and 82.4% per year for ’25 and ’24-’26 [3/3/1 analyst(s) for ’24/’25/’26].
• YF projects YOY 91.9% contraction for ’24 and 111% growth for ’25 (2) along with 5-year annualized growth of 20.0%.
• Zacks projects YOY 90.3% contraction for ’24 and 118% growth for ’25 (3).
• Value Line projects annualized contraction of 16.0% from ’23-’28.
• CFRA projects contraction of 91.5% YOY for ’24 and 54.4% per year for ’23-’25 (2).

Coming up with a long-term forecast is difficult due to scant analyst coverage. The YF 20.0% estimate is unchanged—and therefore suspect, in my mind—from 9 months ago. Interestingly, Value Line’s negative growth estimate accompanies prediction of 60-140% stock appreciation over the next five years with the stock at $37.51 on 4/12/24.

I am taking the lower long-term estimate as my forecast. Initial value is ’23 EPS of $9.10/share (down 28.5% YOY).

My Forecast High P/E is 14.0. Over the past decade, high P/E ranges from 14.4 in ’23 to 56.5 in ’18 with a last-5-year mean of 21.0 and a last-5-year-mean average P/E of 14.9. I am below the range.

My Forecast Low P/E is 4.0. 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 8.7. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) of $14.00 is 35.9% less than the previous close and 29.6% less than the 52-week low. I can’t calculate this by initial value given a negative EPS growth rate. I therefore select [arbitrarily] something less than high EPS. $3.50/share is the lowest value since 2017 ($2.29).

After dividend inception in ’15, the company announced in December (’23) that it would be eliminated. I am forecasting a Payout Ratio (PR) of 0%, accordingly.

These inputs land MED in the BUY zone with a U/D ratio of 4.0. Total Annualized Return (TAR) is 19.5%.

PAR (using Forecast Average—not High—P/E) of 9.4% is less than I seek 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 only 11 studies (my study and 2 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 PR are 8.8%, 5.0%, 14.8, 6.0, and 47.6%, respectively. I am lower across the board. Value Line’s projected average P/E of 20.0 is higher than MS (10.4) and higher than mine (9.0).

MS high / low EPS are $9.90 / $7.70 versus my $3.81 / $3.50: not even close. Value Line predicts a high EPS of $3.80.

MS LSPF of $29.00 is currently invalid. No blame there with the stock down 14.1% (71.3%) over the past (three) month(s).

MS TAR of 41.0% is more than double that of mine.

I think MS is unreasonably optimistic. Little disruption is evident in MS high/low EPS. MS Forecast Low P/E reflects some trouble, but getting multiplied by a relatively normal EPS offsets the impact. The biggest red flag for me is PR. Suspension of the dividend is old news and an internet search for “when will Medifast resume dividend” turns up nothing. Setting PR greater than zero seems like unbridled optimism or ignorance that the dividend has already been terminated.

MS small sample size aside, I believe MOS is robust. All my inputs are at or below their respective [historical] ranges.

Relative Value [(current P/E) / 5-year-mean average P/E] per M* is ridiculously low at 0.24. This number may be a bit exaggerated because a negative EPS growth rate P/E will increase over time with all else being equal.

U/D has MED a Buy under $23/share while the BI TAR criterion is satisfied today given a forecast high price over $53.

I think two thoughts from my last stock report are worth repeating.

First, the multi-level-marketing (MLM) business model gives me pause. 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.

Second, I am concerned about 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 Silly_Butterfly3917 writes on Reddit: “And on the other hand, you have medifast, which is a pyramid scheme that promotes dangerous diets…”