What a brutal six months it’s been for Medifast. The stock has dropped 27.7% and now trades at $9.88, rattling many shareholders. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Medifast, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Medifast Will Underperform?
Despite the more favorable entry price, we're swiping left on Medifast for now. Here are three reasons there are better opportunities than MED and a stock we'd rather own.
1. Revenue Spiraling Downwards
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Medifast’s demand was weak over the last three years as its sales fell at a 37.7% annual rate. This wasn’t a great result and signals it’s a low quality business.
2. Fewer Distribution Channels Limit its Ceiling
With $385.8 million in revenue over the past 12 months, Medifast is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with retailers.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Medifast, its EPS and revenue declined by 28.8% and 37.7% annually over the last three years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Medifast’s low margin of safety could leave its stock price susceptible to large downswings.
Final Judgment
We see the value of companies helping consumers, but in the case of Medifast, we’re out. Following the recent decline, the stock trades at 11.3× forward EV-to-EBITDA (or $9.88 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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