This is not investment advice. Do your own research before taking a position in any of the securities mentioned in the post below.
Happy Monday all!
I spent some of this sunny weekend analysing a new company which recently came up on my radar. Whilst I wish I could say it was good news... sometimes you need to abandon & start again.
That being said, as much as it is great to hear about stocks to BUY, today's article is about a company with strong financials that I would avoid. More importantly, it is an example of why an ok business printing good numbers is no match for a great company printing bad numbers.
Overview of Medifast - A coaching-driven dieting business
For those unfamiliar with Medifast (NYSE:MED), it is a direct-selling diet/weight loss company. In 2002, it launched its main product, later re-branded to Optavia, which is a weight-loss maintenance plan representing +90% of its revenues. Their brand demographic is strongest in North American women aged 30-50; with limited APAC presence.
Interestingly the company adopts a coaching approach where coaches (often former clients) sell these products to customers. I know that sets off warning bells about Amway-style “multi-level marketing” however, two key differences are that 1) the coaches do not pay for inventory (e.g Herbalife) and 2) their commission are only for direct sales instead of the sales of other salespeople so most coaches only do this part-time.
Competitive landscape - <1% mkt share in a super fragmented market
Regardless of whether you think weight loss/meal replacement programs work, this is a big industry. According to Allied Market Research - this market generated $192.2 billion in sales in 2019 and is projected to reach $295.3 billion by 2027 (7.0% CAGR).
As of today - Medifast sales are $1.9bn (so it's <1% of this market). Some meaningful other competitors are Weight Watchers (private), Celsius (CELH), NuSkin (NUS), Herbalife (HLF) and USANA(USNA). So although the market could be argued to be quite big, shown below, it is very segmented and innovative entrants can take market share quickly.
Why discuss $MED? It trades at a low multiple & generates huge ROE yet IMO... their Optavia brand is too new & competition too rife
Well, like $SAM, Medifast had been sold off heavily by investors after a meteoric rise and following this big fall it came up on my radar. Despite their cheaper share price, but I feel this company fails the Peter Lynch test...
Go for a business that any idiot can run - because sooner or later, any idiot probably is going to run it.
Upside #1 - Low multiple: In an expensive stock market (S&P 500 is on +33x P/E), $MED's implied multiple seems low. That being said, few of its competitors trade on +20x P/E multiples due to the huge level of competition in this industry
Upside #2 - Prudent financial management: Since 2017 their sales performance has been very strong and pre-2017 when sales were slow - they actively repurchased shares driving up EPS. Whilst this gives you hope of consistent EPS growth... it is more a sign of good management than a good brand/company
Upside #3 - Essentially free labour: $MED has a very lean overhead structure due to this 'coaching' mode. To put this into perspective, they have c.720 employees... but +52,000 coaches, most of which operate on a simple commission basis.
Downside #1 - 4 years of Optavia: To build a significant brand, takes many years. Whilst Medifast has been going since 1980 - this Optavia brand has only been offering meaningful growth in the last 4 years and this is such a large part of their future income base
Downside #2 - Over-earning: We often think of normalising earning by removing "one-off" items, however, it is also worth adjusting earnings if they are seasonally high. Lockdown has artificially increased the use of their product (with many people dieting after putting on lockdown weight). Looking at a +7yr trend; the company is clearly "over-earning" at the moment. Unsurprisingly this will normalise a bit and earnings can come off a bit (e.g. Similarweb suggests a modest decrease in users)
Conclusion - So as you can see - sometimes you stumble on a company that appears cheap & highly efficient however the question you need to ask is - "how effective would this company be at trading out of an operational downturn".
Sure - the management of $MED seems super impressive/efficient. Sure - the company has been around for +40 years. However, if I wanted to buy a "set & forget" company and I would need a) more market share or b) a longer track record of the main product (Optavia).
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