Get Skinny and Rich With Medifast

October 28, 2009

Most folks when asked what they’d like to change in their lives will give you an answer that centers on their health and/or finances. They’ll tell you they want to be skinnier and make more money. Very few companies can actually help you achieve these goals, yet one company that is helping people lose weight while offering an incredible opportunity to investors is Medifast Inc. (MED)—which is scheduled to report earnings this Thursday.

Medifast sells and markets meal replacement shakes, protein bars, and a variety of other food and drink items, as well as disease-management products for diabetics.  The company’s subsidiary, Take Shape for Life, distributes the products through a direct marketing and sales network of independent distributors (often people who have had success with Medifast) that it calls “Health Coaches.” This is a compelling business model that has proven success—and very limited overhead.

According to the company, Medifast has been recommended by over 15,000 doctors and used by over one million customers since 1980. The key here is doctor recommendations. With the obesity epidemic we face in the U.S., doctors are advising their patients to use Medifast products to lose weight.

This is one of the reasons why Medifast’s business stands head-and-shoulders above others in its industry.

Eating Away at Its Competition

Medifast’s year-over-year sales and gross profit growth are unmatched in the diet industry. With 34% sales growth and 37% gross profit growth, Medifast trounces its competition.

	Medifast	Weight Watchers	eDiets.com	NutriSystem
Sales Growth	+34.7%	-5.9%	-25.3%	-22.3%
Gross Profit Growth	+37.2%	-7.0%	-32.8%	-23.1%

This is an industry I have been following for years, having lead investors to an incredible 170% profit in NutriSystem earlier this decade.  But as you can see from the chart above, in today’s market the other big-name competitors in this market can’t touch Medifast. This is why the company commands a P/E ratio of over 38 when others sport half that. Put plain and simple, the company deserves this valuation and it’s not going to hold the stock back one bit this earnings season.

Analysts are expecting earnings to come in at 19 cents per share, but I think we’ll see the numbers come in closer to 21 cents per share for a 10% surprise. This is not out of the ordinary for MED. Last quarter the company posted a 17% surprise, and the stock has been on an incredible 42% run since then.

According to my 8-point fundamental analysis, I see this as another strong quarter for a strong company in a growing market. Look for a great earnings report this Thursday after the market closes.