No. of Recommendations: 6
Medifast (MED) has had a flawed strategy ever since I first heard of them. I remember MED from 15-20 years ago. MED was born during the era and fad? of very low calorie diets (VLCD). Their “hook” has always been that their products were sold through a physician's office. The doctor has to set up an account with the company and then he re-sells the product for a slight markup. The problem is that any doctor impressed enough with the profit he can generate selling medifast products is not a doctor I would want to be seeing. The basic practice of medicine is a pretty good job. That is why MED has had great difficulty holding on to MD clients over the years. In fact, in 1998 they had lost ¾ of their MD's. The bankruptcy papers for MED had been drawn up. Sales for MED had peaked in 1988 at 50million and by 1998 they were all the way down to 15million. Here is were B T MacDonald ran a successful proxy fight for control of the company. Mr. MacDonald is a pretty impressive guy. He is Mister Marine and has tapped the Corp for more talent. Leo F Williams was recently hired as executive VP. Mr. Williams was a member of the US Marine Corps Reserves for over 25 years. He has held a wide range of prestigious positions including Commanding General for the 4th Force Service Support Group where he was responsible for providing logistics, engineering and medical support to Marine units worldwide. His command consisted of over 10,000 Marines.

Within months of taking over, MacDonald started adding new flavors and 40 additional items to Medifast's meal-replacement lineup, using $700,000 in annual cash flow that became available when he liquidated an herbal-products subsidiary that was sucking the parent company dry. The new offerings, including higher-priced soups and oatmeals, were followed by a favorable review from the Johns Hopkins Weight Management Center. The positive plug, its first in a decade, boosted Medifast's profile among doctors. It also reminded dieters of the brand's affiliation with health professionals. That connection is an important differentiator for a company with a lot of skeptics--and rivals, including retail heavyweights Weight Watchers and Unilever's SlimFast. In 2000 the MED chief made the company's products available on its Web site at the same per-item price ($1.25 to $2) many doctors charge after marking up the products by 10%, on average.

Last, in what I think their best move has been, MED started developing a layman sales force who profit in a sort of Amway-like arrangement. These sellers already account for almost 50% of MED's sales.

MED is turning up. As noted, recently Johns Hopkins gave them a very nice plug for use of the diet in diabetics who need to loose weight. Just recently, MED announced that it has signed a joint venture agreement with XLHealth, Inc., one of the leading diabetes management companies in the United States. The Company's clinically tested Medifast Plus for Diabetics line will be the exclusive nutritional program offering for XLHealth's CMS Medicare Demonstration Project to provide Diabetes, Congestive Heart Failure (CHF) and Coronary Artery Disease (CAD) disease management and pharmacy benefits to over 10,000 Medicare Fee-For-Service patients in Texas. The Demonstration Project is the largest of its kind ever conducted by CMS. Not bad.

Last fall MED undertook an ad campaign that was apparently too successful. They had farmed the telephone response work out to people who were unable to adequately answer questions from callers. So, they halted the campaign to train telephone personnel to be able to field question about the diet. When the halt was announced, the stock took a dive. Now they are ramping the TV campaign up again and are reporting that they are getting very good feedback.

MED has a market cap right under 100million and an enterprise value just over that. They have 8.4 million in cash, 4.9 million in debt. Revs have accelerated dramatically over the past year. Earnings are up 300%. TTM the company is cash flow negative. In the last year they bought into a new manufacturing facility which clearly should be a one time charge. Insiders own 40% of the company. Current year earnings est. at 20c and next year about 36c. Revs should be 25mil this year and 42mil next year.

Shares outstanding are 10million but the float is 6million. Of that 6 million shares, 1.2million are short as of mid Feb!! That's a 20%+ short ratio. Stock options reduce earnings by 2c as of the last 10_K

Unfortunately, if I give MED a growth rate of 25% for the next 5 years with an equity risk of 10% (very generous for this company)… it looks like around 9 bucks a share would be fair value and who knows what an adequate margin of safety would be. When I first started writing these three diets, I thought MED might be the best buy. I don't think so.

MED is set to announce earnings on Monday after the bell. I expect a lot of volatility. With a 20% short ratio… if they have an earnings surprise, this stock is liable to take off. With any disappointment, expect more short selling to drive the price down in an excessive way.

Long and short of it… I guess I'd have to stay away from this one. I still say WTW is the company to own for the long haul and I sure do hope some summer doldrums give a chance to buy in.

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No. of Recommendations: 1
eMiller, thank you for an outstanding post on Medifast. I would stay away from this stock for the reasons that you outlined. Very information background information. Thanks for your work.

Tom Gardner
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