Medifast, Inc.

Company Overview: Medifast, Inc. (NYSE: MED) is a global health and wellness company that makes and distributes nutritional products and plans to assist people in losing weight, maintaining weight, and leading a healthy lifestyle. It operates in the United States and Asia Pacific (Hong Kong and Singapore) through its community, OPTAVIA, where its coaches teach the skill of establishing holistic, healthy habits through its unique "Habits of Health" Transformational System. It uses a direct-to-consumer sales approach to market its products and services, and subscription-based meal-plan orders account for 91.9% of its overall income.

MED Details

Key Takeaways from Q3FY21 (ended September 30, 2021)

• Surge in Topline: The company's revenues in Q3FY21 were USD 413.40 million, a 52.28% increase YoY from USD 271.47 million in Q3FY20.
• Growth in Revenue per Active Earning of OPTAVIA Coaches: MED reported that the average revenue per active earning OPTAVIA Coach in Q3FY21 was USD 6,773 compared to USD 6,329 in Q3FY20.
• Boost in Number of OPTAVIA Coaches: The total number of active earning OPTAVIA Coaches in Q3FY21 climbed by 44.89% to 61,000 from 42,100 in Q3FY20.
• Rise in Net Income: In Q3FY21, the company's net income climbed to USD 41.98 million from USD 34.45 million in Q3FY20, representing a diluted EPS of USD 3.56.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• On December 13, 2021, MED published the results of a new poll that demonstrated a shift in how US adults approach New Year's resolutions. According to the report, only 10% of US individuals keep their resolutions, and over half (47%) of all resolutions fail within the first month. The most significant reason respondents did not complete their 2021 resolutions was a lack of enthusiasm, a lack of strategy, and establishing too many ambitious goals.
• On December 10, 2021, MED announced that it had been named to FORTUNE Magazine's list of the top 100 fastest-growing businesses for the third year in a row. Medifast came in at number 22 and is the only health and wellness company on the list.

Steady Dividends:

• On December 08, 2021, the company declared a quarterly cash dividend of USD 1.42 to its shareholders. It will be payable on February 08, 2022, to shareholders of record on December 21, 2021. MED also intends to continue distributing dividends on a quarterly basis. Over the last five years, the company has regularly paid dividends, as also reflected in the chart below (every D represents a dividend payment):

Consistent Dividends (Data Source: REFINITIV)

Balance Sheet & Liquidity Position

• Slight decline in Cash Balance: The company ended Q3FY21 with total cash and cash equivalents (including marketable securities) of USD 159.90 million, which was less than the USD 174.48 million as of December 31, 2020.
• Boost in Investing Activity: Net cash used in investing activities climbed by USD 15.6 million to USD 17.4 million for the nine months ended September 30, 2021, up from USD 1.9 million for the same period in the previous year. This adjustment was caused by an increase in cash utilised in capital expenditures of USD 18.7 million for the nine months ending September 30, 2021.
• Liquidity Situation: MED maintained a credit facility as of September 30, 2021, which provides for a USD 125.0 million senior secured revolving credit facility with a USD 20.0 million letter of credit sublimit, as well as an uncommitted incremental facility that allows the company to increase the credit facility by up to USD 100.0 million. There were no outstanding borrowings under the credit facility as of September 30, 2021.

Key Metrics: In Q3FY21, MED's ROE and reinvestment rate were 24.5% and 15.0%, compared to the industry median of 5.4% and 3.0%, respectively. Net Margin stood at 10.2% in Q3FY21 vs. industry median of 8.0%.

Return Metrics; Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 50.94% 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 14.36% and 12.59%, respectively, as also highlighted in the chart below:

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Dependence on Third-Party Manufacturers: A considerable majority of MED's food and other products are supplied by third-party manufacturers. If these manufacturers fail to deliver products in adequate quantity/quality on schedule and at acceptable costs, their financials and reputation may suffer.
• Competition Risk: MED operates in the weight management industry and is directly competing with several significant and new players selling various products such as digital tools, app-based health and wellness monitoring systems, etc. Increasing competition from new entrants into this market and an increased success by existing competitors could result in reductions in the company's sales or prices, harming its operations and cash flows.
• Political & Regulatory Risk: The company's entry into the Asia Pacific markets of Hong Kong and Singapore is a critical component of its global growth strategy. Its operations in these nations are vulnerable to economic, political, regulatory, and market circumstances that influence sales volume. If it cannot build a position in these markets, its financial outcomes may suffer.

Outlook:

• Looking forward, MED intends to continue developing novel digital tools to expedite its Coach-driven program and seek prospects for growth in this industry.
• The company believes it is well-positioned for increasing demand for its clinically verified and scientifically evaluated strategies and products.
• In terms of finances, the company anticipates revenue of USD 1.51 – 1.53 billion in FY21, with EPS of USD 13.27 – 13.96. The full-year 2021 earnings forecast estimates an effective tax rate of 23.25 to 24.25%.

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 past six months, MED's share price has corrected 32.60%. The stock is currently leaning towards the lower end of its 52-week range of USD 184.48 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 low twenties (in percentage terms). We believe that the company can trade at a premium compared to its peer's average, considering its no-debt status, strong profitability, steady dividend yield, and underutilised CAPEX activity. We have taken peers like NU Skin Enterprises, Inc. (NYSE: NUS) and Edgewell Personal Care Company (NYSE: EPC). Considering the robust return profile, growth in topline, healthy balance sheet, encouraging outlook, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the current price of USD 193.61, down 2.53% as of February 02, 2022, 12:25 PM ET.

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 unfavourable movement in the stock prices.