Summary
- With a current revenue of nearly $400 million, it is now clear the company will exceed its original revenue guidance.
- Medifast posted a y-o-y revenue increase of 17.6%, while analysts had projected a revenue decrease of 7.6%.
- Based on the data in Figures 3 and 4, my target price for MED is $200, with a potential upside of almost 22%.
My first article on Medifast, Inc. (NYSE:MED) was May 11th of this year. Like usually, I was analyzing MED because I wanted to see if I should add it to my portfolio or not. The issue was that, during the time of this analysis, I had to keep cash on hand in case one of my renters needed to use the grace period that I offered them. By the time I had funds available, I believed that the stock was overpriced, as seen in this article. Not being able to purchase MED in May is the reason why this article is called "Medifast is the one that got away."
When I write articles on Seeking Alpha, I find it helpful to inform the reader of information beyond the typical conflict of interest disclosures. As for MED, I might be overly optimistic about the company's growth potential as the OPTAVIA products helped both my parents lose a considerable amount of weight.
Q2 2020 Highlights
Medifast posted a y-o-y revenue increase of 17.6%, while analysts had projected a revenue decrease of 7.6%. My 2020 revenue projection, based upon data from my model using disposable income as a revenue driver, was even further below that of the market average. This double-digit growth in net revenue shocked several analysts enough that they even asked the company what occurred during the quarter to speed up sales beyond guidance. It is important to remember that, in February, the company informed analysts that they expected mid-single-digit growth for the year due to operational concerns.
According to the company, revenue growth was a result of coaches getting behind the three initiatives that the company had put into place during the period. The company also ran promotions to attract new customers and customers who were inactive for more than twelve months. These promotions were the reason that gross margin went from 75.2% during the 2019 fiscal year, to 73.9% during S1 2020 (use figure 2 to better analyze gross margin).
In an article from Food Navigator, the author presented results from the FMCG Gurus survey that stated that 72% of European shoppers were making attempts to eat healthier due to their experience during the COVID-19 lockdowns. According to data from the survey, consumers are questioning their vulnerability to diseases like the coronavirus and are reevaluating their eating habits. As consumers question their health, the demand for healthier foods should increase.
The current economic crisis is different than what those we have experienced in the past. Therefore, my adjustments to the weight management market forecasts based on disposable income forecasts did not apply to this situation. In my updated model below, I used the original market growth estimates to forecast future sales.
