The recent market weakness has beaten-down stocks lately with high growth names being hit especially hard. While frustrating for investors, this period of volatility allows them to pick up high-quality stocks and discounted prices. One such stock is Medifast, Inc. (NYSE: MED) which is a manufacturer and distributor of weight management and wellness products.
Medifast sells products under a variety of brand names such as Medifast, OPTAVIA, Thrive, and Flavors of Home via point of sale, franchise, and e-commerce channels. Offerings include smoothies, shakes, pancakes, nutrition bars, cereals, oatmeal, soups, and other food items. The Baltimore company was founded in 1980 and has a market cap of $2.3 billion.
Looking in the consumer cyclical sector, Medifast appears undervalued compared to many personal services industry peers. The company has a PE ratio of 15.2 which looks cheap compared to others such as WW International (NASDAQ: WW) at 19, Terminix (NYSE: TMX) at 44.9, and Carriage Services (NYSE: CSV) at 35.5. The personal services industry overall has a PE of 99 and the S&P 500 has a 27.4 PE, so Medifast looks like a good candidate for multiple expansion. The company’s price/sales ratio of 1.7 looks attractive compared to the S&P 500 at 3.1, implying that MED has fallen too far compared to the overall market.
Medifast is a fast grower as it has averaged EPS growth of 38.8% over the past five years compared to the industry average of 18.4% and the S&P 500 average of 24.2%. Sales for Medifast have been growing at a 51.2% average over the past five years while the personal services industry sales have only risen by an average of 0.3% and the S&P 500 has averaged 13.1% growth over the same period. Analyst estimates project MED to grow sales and EPS by 18.3% and 23.5% respectively over the next year, well ahead of estimates for the overall personal services industry of 4.1% sales growth and 13.6% EPS growth. If Medifast can deliver the projected results, the company should be well-positioned to outpace its peers on both the top and bottom lines and could reward investors nicely.
Turning to profitability, MED sports impressive margins, with gross profit of 74.2% and net profit of 11.2% which compares favorably to the industry average gross and net margins of 45.8% and 7.2% respectively. The company’s return on equity margin of 80.5% demonstrates that management has delivered results for shareholders and that the recent pullback appears to be overblown. The stock has a dividend yield of 2.96% so investors receive the dual benefit of current income and outsized growth potential.
Medifast is lightly covered in the analyst community, with only two analysts maintaining ratings, both of which are Strong Buy. As of January 2022, those analysts have an average target price on the stock of $347 per share, which represents tremendous upside from current price levels. MED has been a public company for over four decades but its small market cap keeps it off analysts’ radars, giving investors the chance to pick up shares of a hidden gem company with excellent growth potential and a strong current yield. For investors looking to add a quality small-cap name, Medifast is set up well for long-term outperformance.
Disclosure: Long MED. Spotlight Growth has no relationships with any of the companies mentioned in this article and did not receive payment in any form for its creation. This is an opinion article and is not meant to be financial advise. We are not broker-dealers or investment professionals. Please conduct your own due diligence. For more information on our disclosures, please visit: https://spotlightgrowth.com/disclosures/
