79.4% Upside on Massively Undervalued Stock
Investment Alert: Buy MED Under $$103/share
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
Key Points
- Medifast, a weight loss manufacturer and distributor, has had stunning revenue growth over the past few years, but the share price has fallen by 41% in the past year, leading some investors to wonder if the selling is overdone.
- In its most recent earnings report, Medifast beat earnings per share estimates and top line revenue forecasts, and it currently offers a highly attractive 6.37% dividend yield.
- The company’s management has shown commitment to rewarding long-term shareholders by initiating a share repurchase scheme and maintaining an 8-year growth streak.
Investment Thesis
Some stocks stand out like a sore thumb and others make you scratch your head. The financials are just so good that you can’t help but wonder why the share price is so beaten down. That’s the case with Medifast, a weight loss manufacturer and distributor that makes bars, drinks, oatmeal, pancakes and so on. It’s most famous for its Optavia weight loss program.
Let’s start with the top level revenue growth:
- 2018: 66.1%
- 2019: 42.4%
- 2020: 31.0%
- 2021: 63.2%
- 2022: 4.8%
Clearly, growth had been stunning and just slowed. So that would explain why investors’ optimism has been curtailed over the past year with the share price falling by 41% over the past twelve months.
But is the selling overdone?
Here’s what we know. In its most recent quarterly earnings report, Meidfast management reported earnings per share of $3.70, which was an astonishing beat relative to the consensus of $2.22 from analysts. Top line revenue eclipsed estimates too with $337.2 million reported versus $330.1 million estimated.
The good news doesn’t stop there for prospective shareholders. The company currently offers a highly attractive 6.37% dividend yield, and has a payout ratio of 49.89% suggesting the dividend is quite safe. It’s also had an 8 year growth streak suggesting management is committed to rewarding long-term shareholders.
Other pluses include management’s decision last June to initiate a $100 million share repurchase scheme. At the time, the stock was trading over 80% higher. The conviction of management is a real tailwind because it acts as a virtual put option under the share price. As management repurchases stock, real demand supports share prices and offsets flows from sellers.
The Most Compelling Reason to Buy
Perhaps the strongest argument in favor of Medifast now is valuation. When we ran the numbers it became apparent that, against virtually any yardstick, MED is on sale. For example, a 5 year discounted cash flow forecast model pegs fair value at $194 per share. A dividend model puts intrinsic value at $224 per share. Comparing the company on a price-to-earnings, price-to-sales, and revenue multiples basis puts fair value closer to $175 per share.
No matter how we slice or dice it, we arrive at a fair value far higher than where the share price currently sits. Our base case puts it at $184 per share, 79.4% higher than where the share price currently sits.
Even a cursory look at standard valuation metrics leads to a startling valuation opportunity. For example, the price-to-earnings ratio of the company sits at just 7.8x and we see earnings continuing to rise at close to double-digit percentage levels for the foreseeable future.
With a massive market opportunity – obesity levels in 1960s were roughly 13% versus closer to 43% today – and a proven track record of almost 50 years, Medifast is a valuation play that has the potential to deliver very attractive long-term returns while paying out a handsome dividend yield in the interim.
