Medifast: Gaining Profits from Losing Weight

11/22/2019 5:00 am EST

Focus: HEALTHCARE

John Reese

Founder and CEO, Validea.com And Validea Capital Management

John Reese selects stocks based on the strategies of some of the stock market's most legendary long-term investors. Medifast (MED) is a buy in the model portfolio of his Validea newsletter based on the "Price to Earnings Growth" strategy of famed Fidelity fund manager Peter Lynch.

Medifast produces, distributes and sells weight loss, weight management, and healthy living products, and other consumable health and nutritional products.

Optavia is a personal coaching division of the company that consists of Optavia Coaches, who provides coaching and support to clients utilizing the Optavia platform.

Medifast Direct is its direct-to-consumer business unit that allows customers to order Medifast products directly through its Website or its in-house call center.

The Medifast Weight Control Centers  business unit sells product through franchise and reseller locations, which offers structured programs and a team of professionals to help customers achieve weight-loss and weight-management success at center locations.

Here is a review of the criteria we assess under Peter Lynch's price to earnings growth investment strategy.

DETERMINE THE CLASSIFICATION:

This methodology would consider MED a "fast-grower".

P/E/GROWTH RATIO: PASS

The investor should examine the P/E (12.62) relative to the growth rate (29.80%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company.

This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for MED (0.42) is very favorable.

SALES AND P/E RATIO: NEUTRAL

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth rate high enough to support a P/E above this threshold.

MED, whose sales are $688.9 million, is not considered large enough to apply the P/E ratio analysis. However, an investor can analyze the P/E ratio relative to the EPS growth rate.

INVENTORY TO SALES: PASS

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive.

Inventory to sales for MED was 6.41% last year, while for this year it is 7.76%. Since inventory has been rising, this methodology would not look favorably at the stock but would not completely eliminate it from consideration as the inventory increase (1.35%) is below 5%.

EPS GROWTH RATE: PASS

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years.

This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for MED is 29.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.

TOTAL DEBT/EQUITY RATIO: PASS

This methodology would consider the Debt/Equity ratio for MED (0.00%) to be wonderfully low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.

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