Medifast: Rich Valuation, But Appears Worth It (MED, WTW)

Medifast is a company that sells various weight management and health products. If reading the first sentence evoked feelings of "weight management companies are a dime a dozen", then you are not alone. Many diet and weight management fads come and go.

The most notable recent example was the low-carbohydrate Atkins diet that gained huge popularity and then vanished almost overnight. What warrants a closer look at Medifast is the fact that research studies at the National Institute for Health and Johns Hopkins University have shown the plan to be very effective as well as medically safe. Apart from these studies I have personally noticed how effective their plans were because a number of people I know were on the Medifast diet plan. You have probably often heard the saying that a great company may not make a great investment. Let me now make the case for why Medifast looks like a very interesting investment to me.

While Medifast appears richly valued with a P/E of 42.11 and a Price/Sales ratio of 1.91, its high P/E is easily justified once you look at its growth rate. According to the latest earnings release the company grew revenues by 51% year-over-year and also raised its full year guidance. Companies often achieve such high growth by sacrificing profits. However Medifast continues to remain profitable over 24 consecutive quarters.

Medifast is a small company with a market cap of just $68.23 million and is still not on Wall Street's radar. Hence institutional ownership of this stock is just 3%. The million-dollar question regarding Medifast is whether it can grow fast enough to ever show up on Wall Street's radar. If they can continue to maintain the excellent growth experienced over the last two quarters, there is a good chance it will. To handle future growth, Medifast has already started implementing an enterprise management solution.

Competitors:

Medifast's direct competitors are Slimfast (a division of Sara Lee), Jenny Craig and Weight Watcher's International (WTW).

The Good:

• Attractive quarterly revenue growth of 51% year-over-year.
• A proven weight loss product that is backed by research at highly reputed institutions.
• Small company that has not yet been noticed by Wall Street.

The Bad:

• Medifast is a micro-cap stock and is thinly traded. Hence it can be susceptible to large price swings.
• Trouble converting high revenue growth into profits.

P/S	1.91	Cash	$4.3 Million
P/E	22.04	Long Term Debt	$4.3 Million

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