Medifast: An Undervalued And Overlooked High Growth Stock

About: Medifast, Inc. (MED), Includes: HLF, WW
by: George Kesarios

Medifast is a very cheap high growth play in the wellness space.

The company has been growing at CARG 33% over the past 3 years, and the dip of over the past several months represents a great opportunity.

Growth aside, the company has a great balance sheet, pays a 3% dividend, and has no debt.

One of the best growth bargains I came across recently is a company called Medifast, Inc. (MED). The company plays in the wellness sector helping people lose weight with meals formulated with fiber, low fat and fortified with vitamins and nutrients. The company claims the brand has been recommend by over 20,000 doctors since 1980.

The company has had a streak of very strong growth over the years. And while the market seems to think growth will be slowing down a little, the company is nevertheless a bargain at current levels, and is under-appreciated for such a high quality company.

The company's Q2'19 results were another record quarter. Revenue came in at $187M, up 60% Y/Y, net income rose to $21.5M Y/Y, and increase of 52.3%, and EPS of $1.75 up by 50.9% Y/Y.

The company has been growing revenue at CARG 33% over the past 3 years, and I for one do not see growth tapering soon.

Chart Data by YCharts

For the current year the company raised guidance from a previous range of $720M to $740M, to $730M to $750M. The company guided revenue for Q3 in the range between $190M to $195M, which will be another record quarter. However EPS is expected to be lower in the range between $1.30 to $1.35. The reason for this is that the company has several one time expenses that will hit its bottom line until the end of the year, but starting from 2020 its EPS is expected to rise again.

Analysts on average are expecting revenue for 2019 to be $750 (upper range of guidance), and for 2020 about $920M. If both figures are confirmed, then revenue growth for 2020 will be about 22%. However the company itself is targeting $1B in revenue for 2020. If achieved the average 33% growth rate will remain intact, instead of 22% modeled by analysts.

But even if the company grows by 22% and not 33% in 2020, it is still a very high growth rate.

Chart Data by YCharts

Analysts are also modeling $8.50 in EPS for 2020, which means that on a forward 12 months basis the PE of MED today is about 12. This is an amazing discount to the current market multiple given the growth of the company.

But it gets better. The company has been able to achieve all this with no debt. It also pays a 3% dividend. It has been a long time I come across a company with such high growth metrics, and with such a clean balance sheet.

The sky is the limit for growth

The company's business model seems to be doing miracles for growth. However please note that the company currently serves only the U.S. market. That was not a typo; the $1B in revenue the company is targeting for 2020 is only from the U.S.

The company only recently entered the Singapore and Hong Kong markets. While these markets are small and wont impact revenue and EPS by much, at the same time it might be a steppingstone for Asia.

My guess is that the company at some point will enter China, Indonesia and Malaysia, and the entire Asian continent. When it does, I see no reason why its growth metrics in these markets won't be replicated as has been the case in the U.S.

So as good as the growth metrics might seem so for, if the company enters other international markets over the forthcoming years, growth will continue at the same pace.

But it's not only Asia, the company as no presence in South America and Europe either. So I'm keeping a very close eye on both Hong Kong And Singapore, because it might mean the company is getting ready for international expansion.

Comparing Medifast, Weight Watchers and Herbalife

Chart Data by YCharts

As you can see from the chart above, while revenue for Weight Watchers (WW) and Herbalife (HLF) has been in a range over the past several years, Medifast has been growing by leaps and bounds.

And when comparing balance sheets, Medifast really stands apart.

Chart Data by YCharts

Medifast has $95M in working capital, but with no debt. Weight Watchers has a working capital deficiency of $66M (big red flag), and Herbalife has about $494M, however please note Herbalife currently has 6.5X the revenue of Medifast.

Weight Watchers has about $1.6B of long term debt (bigger than its annual revenue), while Herbalife's balance sheet is better, but still with almost $1.8B in long term debt with total liabilities of $3.6B. Medifast on the other hand has ZERO debt!

Short sellers will fuel the next rally

Chart Data by YCharts

One can probably make a case that the stock at $250 a share was rich, but how does one make a case to increase short positions below $150 a share? I honestly don't know.

Whatever the reason for the record number of short interest, these guys will fuel the next rally. There is no conceivable reason I can find for these short positions.

Whatever their logic, I recon the stock has fallen enough for buyers to be building positions at current levels. And when the shorts realize the stock cannot go down any further, I think they will reverse positions.

That's when I think the stock will rally once again, and I think it will be sooner than later.

Bottom line

Medifast is a company in the wellness space, with a clean balance sheet, very high growth, and until recently was doing business only in the U.S.

The company is poised to grow between 22-33% in 2020, and currently has a forward PE about 12 and pays a 3% dividend.

So if you want to diversify into the wellness space, I would take a very good look at this stock. I would also buy Medifast as opposed to Weight Watchers or Herbalife.

Disclosure: I am/we are long MED. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.