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Medifast (MED) Up 30.4% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Medifast (MED - Free Report) . Shares have added about 30.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Medifast due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Medifast Q3 Earnings Surpass Estimates, Increase Y/Y

Medifast delivered solid third-quarter 2020 results, as both earnings and sales surged year over year and cruised past the respective Zacks Consensus Estimate. Strength in OPTAVIA was a major driver, with average revenue per active earning OPTAVIA coach increasing both year over year and sequentially.

The company posted adjusted earnings of $2.91 per share, which surpassed the Zacks Consensus Estimate of $2.49. Moreover, the bottom line grew significantly from $1.32 reported in the year-ago period.

Net revenues of $271.5 million advanced 42.8% year over year and beat the Zacks Consensus Estimate of $246 million. Markedly, OPTAVIA-branded products formed 83% of consumable units sold in the quarter, up from 78% in the year-ago period. Incidentally, total active earning OPTAVIA coaches jumped 30.7% to 42,100.

Further, average revenue per active earning OPTAVIA coach came in at $6,329, up from $5,715 in the same period last year.  Also, the same grew 8.2% from the preceding quarter, marking the third straight quarter of sequential growth. Productivity was backed by a rise in the number of clients as well as elevated average client spend compared with the second quarter. Coach productivity improvement was a result of the company’s constant focus on developing tools and programs to increase efficiency of coaches. Also, the relevance of the company’s offerings amid an environment where consumers are choosing health and wellness options has been an upside.
 
Gross profit jumped 42.7% to $142.9 million, while the gross margin remained flat year over year at 75.2%.

Moving on, SG&A expenses increased from $122.7 million to $159.5 million in the quarter, mainly accountable to escalated OPTAVIA commission costs, stemming from higher OPTAVIA sales, and greater salaries and benefits. This was partly compensated by lower sales and marketing costs. As a percentage of revenues, adjusted SG&A expenses declined 580 basis points to 58.7%. Adjusted income from operations more than doubled from $20.3 million to $44.6 million, thanks to higher gross profit, partially offset by a rise in SG&A expenses. The respective margin expanded 570 bps to 16.4%.

Other Financial Updates

The company concluded the quarter with cash and cash equivalents of $156.5 million and total shareholders’ equity of roughly $140 million. Notably, management did not have any interest-bearing debt on its balance sheet as of Sep 30, 2020.

Concurrently, management announced a quarterly cash dividend of $1.13 per share, which is payable on Nov 6, 2020. Additionally, it has roughly 2,323,000 shares remaining under its buyback plan. The company anticipates maintaining its quarterly dividend payment practice.

Wrapping Up

The company’s programming initiatives, together with improvements to the organization, helped Medifast witness solid progress in the third quarter. The company remains committed to making further investments to improve its infrastructure in order to aid growth. Further, Medifast is well placed to encash on the opportunities arising from consumers’ rising inclination toward health and wellness in the United States as well as other parts of the world.  Markedly, it is in a good shape to deliver well despite the challenges posed by the pandemic to consumer-oriented businesses. 

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month.

VGM Scores

Currently, Medifast has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Medifast has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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