Medifast currently trades at $13.57 per share and has shown little upside over the past six months, posting a small loss of 0.7%. The stock also fell short of the S&P 500’s 18.4% gain during that period.
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Why Do We Think Medifast Will Underperform?
We're cautious about Medifast. Here are three reasons why MED doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Medifast’s demand was weak over the last three years as its sales fell at a 33.9% annual rate. This was below our standards and is a sign of poor business quality.
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
Medifast doesn’t pass our quality test. With its shares trailing the market in recent months, 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. Let us point you toward a dominant Aerospace business that has perfected its M&A strategy.
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