Company Overview: Medifast, Inc. (NYSE: MED) is a global health and wellness company that manufactures and distributes nutritional products and plans to help people lose weight, maintain their weight, and live a healthy lifestyle. Through its community, OPTAVIA, it operates in the United States and Asia Pacific (Hong Kong and Singapore), where its coaches teach the art of developing holistic, healthy habits through its signature "Habits of Health" Transformational System. It sells its products and services using a direct-to-consumer sales model and generates 91.9% of its total revenue from subscription-based meal-plan orders.

MED Details

Key Takeaways from Q3FY21 (ended September 30, 2021)

• Double-Digit Growth in Revenue: In Q3FY21, the company's total revenue amounted to USD 413.40 million, representing a 52.28% increase year-over-year from USD 271.47 million in Q3FY20.
• Revenue per Active Earning OPTAVIA Coach: In Q3FY21, MED reported that the average revenue per active earning OPTAVIA Coach was USD 6,773 vs. USD 6,329 for Q3FY20, attributable to a higher number of clients managed by each coach complemented with a growth in average client spend.
• Slight Decline in Gross Margin: MED reported a gross profit of USD 307.06 million for the current quarter, representing a relatively lower gross margin of 74.3% vs. 75.2% for Q3FY20, primarily due to promotional activity and increased product and shipping costs driven by inflation in raw ingredient, freight and labour costs.
• Surge in Net Income: The company's net income increased to USD 41.98 million in Q3FY21 from USD 34.45 million in Q3FY20, representing diluted EPS of USD 3.56 in Q3FY21.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• On October 11, 2021, MED announced that its community, OPTAVIA held its third annual Healthy Habits for All Week from Monday, September 20, 2021, through Sunday, September 26, 2021. Through better education and expanded access to resources, Healthy Behaviours for All Week aims to assist marginalised populations worldwide in adopting healthy habits.

• On August 11, 2021, MED launched the OPTAVIA app (released in late July 2021), a holistic app for clients that contains account information, the possibility to save details for auto-shipments, access to order history details, and "Lean & Green" recipes, among other things. The app has been downloaded over 150,000 times since its release.

Other Key Findings in Q3FY21  

• MED declared an aggregate USD 16.6 million (USD 1.42 per share) in quarterly dividend on September 09, 2021, which was paid on November 08, 2021, to shareholders of record on September 21, 2021.
• MED repurchased common shares worth USD 26.3 million during Q3FY21. There were 2,131,689 common shares available for repurchase under its stock repurchase program at quarter-end.
• The company obtained a USD 125.0 million senior secured revolving credit facility on April 13, 2021, with an option to increase the facility amount by up to USD 100.0 million. No amount was borrowed under the facility as of November 04, 2021.

Balance Sheet & Liquidity Position

• Decreased Cash Balance: The company exited Q3FY21 with total cash and cash equivalents of USD 159.90 million, relatively lower than USD 174.48 million at the end of FY20.
• Cashflow from Operations: Operating cash inflow during 9MFY21 decreased to USD 102.0 million from USD 125.37 million in the prior corresponding period.
• Debt-Free Company: While MED has USD 125.0 million available under its credit facility, no amount was withdrawn as of September 30, 2021.

Key Metrics: In Q3FY21, MED's operating and net margins were 13.3% and 10.2%, compared to the industry median of 13.3% and 8.2%, respectively. ROE stood at 21.5%, 1,610 bps more than the industry median.

Operating Matrix; Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 50.94% of the total shareholding, while the top 4 constitute the maximum holding. BlackRock Institutional Trust Co., N.A. and The Vanguard Group, Inc., hold the maximum stake in the company at 14.36% and 12.59%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Dependence on Third-Party Manufacturers: Third-party manufacturers provide a significant portion of MED's food and other products. If these manufacturers fail to deliver the products in appropriate quantity/quality on time and at reasonable prices, it could harm its financials and reputation.
• Competition Risk: MED operates in theweight management industry and faces direct competition from various significant and new entrants selling multiple products, including digital tools, app-based health, and wellness monitoring solutions, etc. An increase in demand for these competitors' products could be detrimental to MED's operating performance.
• Economic Slowdown Risk: MED's prospects are significantly dependent on the product sales and fees earned by its OPTAVIA coaches. Accordingly, any unfavourable changes in general economic conditions, economic slowdown, a downturn in the consumers' discretionary spending could adversely impact its overall financial performance.
• Regulatory Risk: MED operates in a highly regulated industry and is subject to strict regulatory norms regarding advertising, consumer disclosures, privacy, pricing, and billing arrangements. As a result, more stringent regulatory oversight could impair its profitability.

Outlook

• Looking forward, MED plans to continue developing innovative digital tools to accelerate its Coach-driven program while also looking for opportunities for growth in this industry.
• It believes it is comfortably positioned, with growing demand for its clinically proven and scientifically tested plans and products.
• In financial terms, the company expects to generate revenue of USD 1.51 – 1.53 billion in FY21, along with EPS to the tune of USD 13.27 – 13.96.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the past six months, MED's share price has corrected 30.22%. The stock is currently leaning towards the lower end of its 52-week range of USD 183.46 to USD 336.99. We have valued the stock using the Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company is trading at par with its peer's average, considering its no-debt status, strong profitability, increasing demand for its products, etc. We have taken peers like NU Skin Enterprises, Inc. (NYSE: NUS) and Edgewell Personal Care Company (NYSE: EPC). Considering the strong topline performance, decent dividend yield, robust balance sheet, positive outlook, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the current price of USD 204.705, up 0.16% as of December 08, 2021, 11:39 AM ET.

MRK Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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