Medifast has been treading water for the past six months, recording a small loss of 0.7% while holding steady at $13.57. The stock also fell short of the S&P 500’s 18.4% gain during that period.
Is there a buying opportunity in Medifast, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Medifast Will Underperform?
We're cautious about Medifast. Here are three reasons you should be careful with MED and a stock we'd rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Medifast struggled to consistently generate demand over the last three years as its sales dropped at a 33.9% annual rate. This was below our standards and signals it’s a low quality business.
2. EPS Trending Down
Analyzing the change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Medifast, its EPS declined by 71.3% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Medifast’s margin dropped by 7.6 percentage points over the last year. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business. Medifast’s free cash flow margin for the trailing 12 months was breakeven.
Final Judgment
We see the value of companies helping consumers, but in the case of Medifast, we’re out. With its shares underperforming the market lately, the stock trades at $13.57 per share (or a forward price-to-sales ratio of 0.4×). The market typically values companies like Medifast based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d suggest looking at the Amazon and PayPal of Latin America.
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