Medifast trades at $11.62 per share and has stayed right on track with the overall market, gaining 9.6% over the last six months. At the same time, the S&P 500 has returned 12.7%.
Is now the time to buy Medifast, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Medifast Will Underperform?
We’re passing on Medifast for now. Here are three reasons why MED doesn’t excite us, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall 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 38.7% annual rate. This was below our standards and is a sign of poor business quality.
2. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Looking at the trend in its profitability, Medifast’s operating margin decreased by 9.5 percentage points over the last year. Medifast’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 6.8%.
3. EPS Trending Down
Analyzing the long-term 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 and revenue declined by 29.9% and 38.7% annually over the last three years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Medifast’s low margin of safety could leave its stock price susceptible to large downswings.
Final Judgment
Medifast doesn’t pass our quality test. That said, the stock currently trades at $11.62 per share (or a forward price-to-sales ratio of 0.5×). 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 recommend looking at one of our top software and edge computing picks.
Stocks We Would Buy Instead of Medifast
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