Company Overview: Medifast, Inc. (NYSE: MED) is a global health and wellness company focused on manufacturing and distributing nutritional products and plans that promote weight loss, weight management, and healthy living. It operates in the US and the Asia Pacific (Hong Kong and Singapore) through its community, OPTAVIA, where its coaches teach the art of developing holistic, healthy habits through its signature "Habits of Health" Transformational System. It sells its products and services using a direct-to-consumer sales model and generates 91.0% of its total revenue from subscription-based meal-plan orders.

MED Details

Key Takeaways from Q2FY21 (ended June 30, 2021)

• Robust Growth in Revenue: In Q2FY21, the company's total revenue amounted to USD 394.19 million, representing a steep 79.18% increase year-over-year from USD 220.0 million.
• Revenue per active earning OPTAVIA Coach: In Q2FY21, MED reported that the average revenue per active earning OPTAVIA Coach was USD 6,662 vs. USD 5,851 for Q2FY20, due to higher number of clients managed by each coach plus an increase in average client spend.
• Slight Improvement in Gross Margin: MED reported a gross profit of USD 293.71 million for the current quarter, representing a higher gross margin of 74.5% vs. 72.4% for Q2FY20, primarily due to the discontinuation of promotional activities undertaken during Q2FY20.
• Increase in Net Income: The net income for Q2FY21 was USD 46.96 million vs. USD 21.94 million in Q2FY20, representing diluted earnings per share (EPS) of USD 3.96.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments:

• On August 11, 2021, MED announced the launch of its OPTAVIA app (released in late July 2021), a comprehensive app for clients which includes various features such as account information, option to save details for auto-shipments, access to order history details, "Lean & Green" recipes, etc. Since its launch, the app has already been downloaded around 150,000 times.
• From July 29 – August 01, 2021, the company conducted a live-streamed annual OPTAVIA Convention at the Georgia World Congress Center in Atlanta, with more than 15,000 registrants.

Other Key Findings in Q2FY21

• MED repurchased common shares worth USD 12.2 million during Q2FY21. At quarter-end, there were 2,249,366 common shares available under its stock repurchase program.
• The company secured a USD 125.0 million senior secured revolving credit facility on April 13, 2021, with an option to increase the facility amount by up to USD 100.0 million. No amount was borrowed under the credit agreement as of August 04, 2021.
• MED declared an aggregate USD 16.9 million (USD 1.42 per share) in quarterly dividend on June 03, 2021, which was paid on August 06, 2021, to shareholders of record on June 22, 2021.

Balance Sheet & Liquidity Position

• Strong Cash Balance: The company exited Q2FY21 with a cash balance (including investment securities) of USD 197.43 million, 13.15% more than USD 174.48 million reported at FY20 end.
• Cashflow from Operations: Operating cash inflow in H1FY21 was USD 86.20 million vs. USD 84.25 million in H1FY20.
• Debt-Free Company: While MED has USD 125.0 million available under its credit facility, no amount was withdrawn as of June 30, 2021.

Key Metrics: In Q2FY21, MED's operating and net margins were 15.6% and 11.9%, higher than the industry median of 13.9% and 8.5%, respectively. ROE stood at 25.4%, an improvement from 19.3% for Q2FY20.

Profitability Metrics and ROE; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 50.65% of the total shareholding, while the top 4 constitute the maximum holding. BlackRock Institutional Trust Co., N.A. and The Vanguard Group, Inc. hold the maximum stake in the company at 13.98% and 12.29%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Dependence on Third-Party Manufacturers: A substantial amount of MED's food and other products is supplied by third-party manufacturers. MED's brand name and financial standing could suffer if these manufacturers fail to supply the products in adequate quantity/quality on time and at acceptable prices.
• Technology Risk: MED conducts most of its business online. Hence, it depends on software, hardware, network systems, cloud-based technology, etc. Therefore, any defects, glitches or interruptions in their operations could hurt MED's brand image and impact its business.
• Regulatory Risk: The weight loss industry (in which MED operates) is strictly regulated by laws relating to advertising, consumer disclosures, privacy, pricing and billing arrangements, among others. Any restrictions on the company's operations could prove to be detrimental to its financial standing.
• Stiff Competition: The company faces intense competition in the weight management industry. New entrants with significant resources or increased success by existing players could cause MED's product demand to fall.

Outlook

• Looking forward, MED is focused on using advanced technologies to develop digital products, channels, and platforms to further promote the engagement between its coaches and clients.
• In addition, it is continuing to accelerate its supply chain transformation to cater to the increased demand for health and wellness initiatives. As a result, it expects to generate USD 2.0 billion in revenue sooner than it previously expected.
• On the financial front, MED expects its FY21 revenue to range from USD 1.425 billion to USD 1.525 billion, with EPS ranging between USD 12.70 and USD 14.17.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last three months, MED corrected ~18.79%. The stock is currently at the mid-point of its 52-week range of USD 139.59 to USD 336.99. We have valued the stock using the Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price with an upside of mid-teens (in percentage terms). We believe that the company can trade at a slight premium compared to its peer's average, considering the tremendous surge in the top and bottom line, higher profit margins, and increasing demand for its OPTAVIA products and services. We have taken peers like USANA Health Sciences, Inc. (NYSE: USNA) and Inter Parfums, Inc. (NASDAQ: IPAR). Considering the robust fundamentals, positive outlook, current valuation, and associated risks, we give a "Buy" recommendation on the stock at the closing price of USD 238.25, up ~1.05% as of September 08, 2021.

MED Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.