Medifast Just Hit Its 20th 5-Year Low. Are You Smart/Dumb Enough to Buy?

On Wednesdays, I usually write about stocks hitting 52-week lows or 52-week highs. However, while searching for an interesting stock to discuss, I noticed Medifast (MED) had hit its 20th 5-year low in afternoon trading. 

I’ve never owned MED stock but know its peaks-and-valleys trading pattern. When things are good, its shares go sky high, and when they’re bad, as they are now, there’s no valley low enough. 

Medifast runs a business selling weight management products and services. Ozempic, Wegovy, and all the other miracle drugs used for treating obesity are selling like hotcakes. It’s hard to know where this current trend will end up. 

Medifast’s current share price should be tempting for the smart-money value investor. Its stock is a piece of excrement at the moment—nuclear waste that no one wants to touch or handle. That’s always the preferred condition for finding and buying a down-and-out value play. 

The opposite argument is that Medifast is a value trap, and its stock will continue falling from its May 2021 all-time high of $336.99. Its stock should be avoided at all costs. 

So, the question is, are investors smart or dumb for wanting to buy its stock at a 5-year low? I’d say a little of both. Here’s why. 

You’re Smarter Than a Fox Buying at $26

When MED stock traded at its all-time high nearly three years ago today, it generated $935 million in revenue in the 12 months ending Dec. 31, 2020, with $134 million in operating income, a 14.3% operating margin. 

In 2021, its operating margin was about the same, with $1.53 billion in annual revenue. Its revenue peaked the next year at $1.60 billion but an operating margin of 12.3%, about 200 basis points less than a year earlier. 

Fast forward to 2024. Its latest trailing 12-month revenue through March 31 is $898 million, the lowest level of sales for the company since 2017, while its 9.1% operating margin hasn’t been this low at any time in the past decade. 

This hardly seems like a ringing endorsement to buy Medifast. 

However, when you consider that its market cap is currently 1.41 times book value (BV) as I write this, according to S&P Global Market Intelligence, compared to 18.95 times BV in June 2021, when it was at its all-time high, you can’t help but wonder what if it was valued somewhere in the middle. 

The average of the two P/B ratios is 10.18. Its current book value is $211 million. At this multiple, its market cap would be $2.15 billion, 7.5x the current $287 million.    

I’m not a rocket scientist, but that seems like a good upside with little downside. 

I mean, it’s not like it’s losing money or something. 

The Falling Knife Is Sharper Than It Looks

The big argument against buying its stock at current prices is that it's on a crash course to $0. That's why they call it a falling knife. It's not something you want to catch unless you've got a death wish.

Since MED hit its all-time high at the end of May 2021, except for three short stints where it rebounded -- October/November 2021, May/June 2022, and June/July 2023 -- it’s been on a non-stop train right into the ground. It’s lost 92% of its value in the past 36 months. 

It doesn’t help that only two analysts cover its stock, giving it a Hold rating (3.00 out of 5) with a $37.50 target price, 41% higher than where it’s currently trading. On the surface, those bullish on its stock would argue that there’s still plenty of upside available despite the apparent hole in its business model. 

However, on Tuesday, the DA Davidson analyst covering MED cut their target price by 38% to $25. My guess is that the average of the two analysts' target prices is down $10 to $27.50. That’s just a dollar or two higher than its current share price. 

The Davidson analyst cut their target after the company reduced its 2024 earnings per share estimate to $0.75, down from $1.86. Investing.com reported two reasons why the floor gave out on its EPS projection. 

1) The company uses its network of OPTAVIA coaches to “teach Customers how to develop holistic healthy habits through the proprietary Habits of Health® Transformational System,” its website states. 

The more coaches, the more revenue. It’s that simple. In Q1 2024, the number of active earning Optavia coaches was 37,800, 36% lower than a year earlier. To make matters worse, the average revenue per active earning OPTAVIA coach in the quarter was $4,623, 22% lower year over year. 

When times are good, both numbers should be higher, not lower. 

2) The company provides a GLP-1 support nutrition package for customers utilizing weight-loss drugs. Medifast generates an average of $217 per customer compared to $400 generated from its original 5-and-1 plan. 

So, it will need to attract new customers to fill in the difference. That likely means higher marketing expenditures in 2025. Originally expected to be $37 million for the year, they could hit $50 million when all is said and done. 

Ultimately, if it doesn’t add coaches and product sales, its 2025 earnings could drop to $0.65 a share, which is a big reason why its shares keep falling.   

The Bottom Line

First, there is no question that MED stock is at a 5-year low for good reason. Its business model remains fundamentally flawed, with few growth levers. 

Secondly, Ozempic, Wegovy, and the others aren’t helping its cause despite its efforts to support its customers opting to use GLP-1 products.

There is no question that it’s got its work cut out. 

In December, it wisely discontinued its dividend, opting to save the money to invest in its business transformation by driving customer acquisition and improving the customer experience. 

I have no idea whether it will work. The only thing I do know is that it seems possible for Medifast to make money, albeit much less, during this slowdown in revenue caused by turning its business model upside down.

Options make sense for aggressive investors interested in a deep value play with Medifast. Risk-averse investors should avoid it. 

 

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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.