Seven Lakes market analysis

Why investment funds are buying Medifast stock

Author

Seven Lakes Research
September 20, 2023

Hello Seven Lakers,

we had a look at our data and noticed that big investment funds and whales have been buying Medifast Inc. stock (NYSE: MED) 

The list of funds included:

  • Renaissance Technologies: increased by 5% their MED portfolio (worth $55.3 million)

  • Citadel

  • Point72 Asset Management

If you want to be notified every day when funds, whales, politicians do similar purchases, feel free to click below 👇👇👇👇

What is Medifast (MED)?

  • Medifast Inc. is the company behind OPTAVIA, one of the fast-growing weight loss program in the United States

  • Medifast’s growth over the last few years is a reflection of the unique approach they have: they provide customers with Coaches to support their health and wellness journey, which is often lonely and difficult

  • Their offers are the following

    • Independent coaches 

    • the OPTAVIA community for connection and support

    • A proprietary system which offers easy steps to a sustainable lifestyle

    • Clinically proven health products and plans

Why are investment funds buying MED?

  • In August, Medifast reported 2Q23 results

  • 2Q23 Revenue was $296.2 million, a 34.7% decrease vs. last year

  • This was driven by a decrease in the number of active OPTAVIA coaches (-21% to 53,100) and a decline in productivity per coach OPTAVIA coach (-16$ to $5,578 revenue per coach)

  • Announced cash dividend of $1.65 per share 

  • Announced that they have $147.4 million in cash with little to no debt (40% increase vs. last year)

As earning results were not optimal, the stock went down -17% in August

After that the price decreased so much, the investments funds thought that Medifast is now a interesting long-term buying investment opportunity, currently trading at a very fair valuation (given significant price decrease)

If you want to be notified every day when funds, whales, politicians do similar purchases, feel free to click below 👇👇👇👇

Why Investment Funds think Medifast might be an interesting long term play?

Reason #1: Management

  • Management managed to generate a competitive advantage over traditional diet companies; this is because:

    • It promotes a program that focuses on holistic wellness (viewing weight loss as a catalyst for greater changes)

    • It offers personalized, empathetic support from Coaches & Community that acts as a network effects moat

  • Management is solid and is doing good job in creating shareholder value (i.e., increasing stock price) via aggressively shares repurchases (In 2020, management repurchased 57,144 shares; In 2021 and 2022, management repurchased 125,133 and 199,581 shares, respectively)

  • In addition to share repurchases, Medifast also offers a quarterly cash dividend for extra shareholder return

  • The CEO’s compensation structure is made up of long-term incentives (64% of total compensation) to ensure long-term performance of the company’s stock

Reason #2: Efficiency

  • Medifast is an extremely efficient business

  • The business currently operates at a ROE of 84.4% and a ROIC of 82.7%

  • With a WACC of 10.4%, Medifast operates at a ROIC to WACC ratio of 7.94x, showcasing ability to generate returns on reinvested cash at rates far higher than cost of capital

  • In 2013, Medifast operated with a ROIC of 36.3%, compared to today where the business operates at a ROIC of 82.7%: this shows that Medifast developed strong competitive advantage

Reason #3: Income Statement

  • Medifast’s had nice sustained growth in revenue, gross profit, and earnings within the last decade

  • Since 2013, Medifast has grown revenue at a CAGR of 14%

  • Currently, Medifast operates with a LTM gross margin of 70.9%: pretty high

  • In terms of earnings, Medifast has grown EBITDA at a CAGR of 13.4% since 2013, with EPS growing at a CAGR of 19.4% in that same time period (This growth in EPS can largely be attributed to share repurchases)

Reason #4: Balance sheet

  • Looking at Medifast’s balance sheet, we can see that the business operates in good financial health

  • Medifast currently holds $147.4 million worth of cash and equivalents on hand, with no short term borrowings or long-term debt

  • Additionally, with little to no debt on the balance sheet, Medifast has plenty of runway to repurchase more shares, reinvest more cash back into the business, or increase / offer a dividend, all of which help drive increased shareholder value

Reason #5: Cash flows

  • We can see some stellar sustained growth free cash flow within the last decade, showcasing the business’ increased operational efficiency

  • Since 2013, Medifast has grown free cash flow growing at a CAGR of 18.5%

  • Medifast will likely be able to generate more and more free cash flow, allowing them to reinvest cash back into the business, repurchase shares, or offer / increase dividends

Summary

The characteristics above make the stock very attractive to investment funds. That is why, after price decrease, all of them bought more of Medifast stock

If you want to be notified every day when funds, whales, politicians do similar purchases, feel free to click below 👇👇👇👇

 Concluding remarks

Medifast is a quality business, and valuation is currently considered low by several investments funds (for them it is a buying opportunity)

This is reinforced by business’ ability to generate free cash flow

While this is a cheap valuation, it could make sense given a tough macroeconomic environment that has hurt Medifast’s business in the short term

But seems like all investment funds are bullish on the stock in the long term

If you want to be notified when investment funds complete similar purchases, feel free to click below 👇👇👇👇

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