Highlights From Q2 2006 Results for Medifast (MED)

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August 14, 2006 | SIN Picks | | Author Asif

Medifast (MED) reported quarterly results today with revenue growing 89% and income increasing 100% when compared to the same quarter last year. While the numbers are not as spectacular as last quarter, I am satisfied with another triple digit earnings increase.

Highlights from the first quarter 2006 conference call are given below,

  • Revenue came in at $20 million vs $10.6 million for the second quarter of 2005, an increase of 89% year-over-year.
  • Income for the second quarter came in at $1.475 million or 12 cents per share (11 cents per diluted share) when compared to $0.753 million or 6 cents per share last year, an increase of almost 100% year-over-year.
  • Selling, General and Administrative expenses (SGA) increased to $12.6 million from $6.8 million last year. SGA increased primarily on account of increased ad spending, which rose from $1.2 million to $4.5 million. As a percentage of sales, SGA actually fell 3% to 61% for the six month period ended June 30, 2006 when compared to 64% for the same six month period in 2005.
  • Medifast increased guidance for the fourth consecutive quarter. Full year revenue guidance was increased to a range of $70 to $72 million from the earlier guidance of $66 to $68 million. This time Medifast did not raise guidance on income and still expects to earn 38 to 40 cents per share.
  • Based on a question on the conference call, Medifast offered a breakup of revenue increase by division. The direct-to-consumer model posted a 160% increase in revenue. The “take shape for life” division posted a 70% increase in revenue and the clinics posted a 25% increase in revenue. The clinics are now profitable while they were not profitable last year.
  • Customer acquisition costs (CAC) jumped from $135 per customer in 2005 to $150 per customer in Q2 2006, representing an increase of 11.11%. This was a cause for concern and lead to many questions during the conference call as higher CAC usually translate into lower operating margins. Medifast claimed that the higher CAC was on account of some advertising testing on a wider demographic and they expect CAC to drop in the future. The lifetime value of customers still remains about $575 per customer.
  • Medifast, which is currently listed on the American Stock Exchange, soon expects to be listed on the NYSE. The date for this NYSE listing would be around August 25, 2006. This does not come as much of a surprise as Medifast was added to the Russell 3000 index on June 16, 2006 and is gaining recognition amongst institutional investors.
  • The company plans to spend about $11 million  to $12 million on advertising in 2006 and even more in 2007. The breakup of advertising spending did not change from the first quarter of 2006 and remains 55% print, 35% TV and 10% web.
  • Cash balance increased to $2.5 million when compared to $1.2 million in the second quarter of 2005. The company increased inventory in anticipation of future sales growth.

The stock however dropped almost 25% in after hours trading to $13.46. It probably fell on concerns about increase in CAC and the drop in income when compared to the first quarter of 2006. However a 25% correction seems extreme for a company that is still exhibiting very high growth and has raised guidance for the fourth consecutive quarter.

I have often seen stocks drop in after hours trading based on some news and actually open higher the next day. It will be interesting to see how the broader market interprets results tomorrow.

If you are interested, you can check out highlights from the first quarter 2006 here and the fourth quarter 2005 here. Medifast is now up more than 230% since I added it to the SINLetter model portfolio in December and you can check out the reasons why I like Medifast here.




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Comments

  1. Jerry
    August 14th, 2006

    Just want to thank you for your post on the Yahoo message board and your recap of the MED CC.  Hope you are right about a rebound tomorrow.  Its pretty hard to see 25% of your investment go down in just one evening.

    I’m new to the "playing" the stock market and hope to learn as much as I can from more seasoned investors like you.

    Thanks,

  2. Asif
    August 14th, 2006

    Thanks Jerry. Short-term price movements are quite often irrational as the market tends to overreact both on the positive and the negative side. To add to that, the markets are currently volatile and looking for a direction.

    While stocks like Medifast and VA Software have certainly helped the SINLetter model portfolio over the last year, diversifying across various asset classes, industries and even countries is very important to help avoid sharp setbacks to a portfolio. After all the first rule of investing is preservation of capital. Please check out our investing resources page, it has a lot of links to books (I get no affiliate commissions), useful websites and good blogs. 

  3. Jerry
    August 16th, 2006

    Asif,

    Well, MED really took a beating yesterday.  Do you see the current price at or near the base for MED untill the next quarter numbers are given?  Could it still go lower?  I still have faith in the company and the products they have as I am a user and have had great success with their plan.

    Thanks,

  4. Asif
    August 16th, 2006

    Yes it did Jerry and continued to fall today. As of August 13th, Medifast was the top performing stock YTD with a gain of 244% as you can see from the third table on this blog post. While the fundamentals are strong, there was a lot of interest from "momentum investors". If stocks with high valuations even stumble a little (or are perceived to stumble), they are hit hard. This is exactly what  happened with Medifast. The market appears to be fixated on the CAC number rising from $135 to $150 and the income forecast not getting raised.

    Do I think it has fallen enough already? Yes. Will it continue falling lower? Probably. If the market has not priced in the fact that the income in the next two quarters is not going to be great based on the estimates provided by the company, then it may fall further but I would view a drop from this level as a buying opportunity.

    Their full year earnings forecast is 38 to 40 cents a share. They earned 13 cents in the first quarter of 2006 and 11 cents in the second quarter (per diluted share). So they are likely to only earn 14 to 16 cents in the next two quarters combined. The fourth quarter is traditionally their slowest (who diets during the holidays season?) and that might explain why they left their income forecast unchanged.

  5. Jerry
    August 19th, 2006

    Again thanks for the info.  I hope that this is the low point for the year and that it will gain some momentum now and bounce back.

  6. Jerry
    September 21st, 2006

    Asif,

    Hello again,

    Its been over a month now since we last spoke about MED.  After the beating in August, it gets hit again with a negative article from Barron’s, if you haven’t read it here is a link.

    http://yahoo.smartmoney.com/barrons/index.cfm?story=20060906&afl=yahoo

    MED did respond to the article, but the damage was already done.  I’m just happy that it has had two up days in a row.  How do you feel about the future?  Will we just go sideways until next CC?  Any thoughts would be appreciated?

    Thanks,

    Jerry

  7. Asif
    September 22nd, 2006

    Hi Jerry,

    I have been intently following MED and did get a chance to read the Barron’s article and Medifast’s response to that article. In case other readers have not had a chance to read the Medifast response, you can find it here,

    http://library.corporate-ir.net/library/95/956/95636/items/211207/Barronsletter.pdf

    While I cannot predict short-term price movement, it appears that Medifast rapidly hit the $8 price target the bears had mentioned and I feel that the stock is likely to go sideways until the start of next year.

    I believe, at this point, almost everyone with any interest in this stock realizes that earnings will be flat or down over the next two quarters, unless they beat their own estimates or raise guidance. So I am going to hold the rest of my position as I still like their long-term prospects. Please note that I did buy Medifast at around $3 a share and do not use margin.

    I have also written to Medifast investor relations about an interview with their CEO and they said they would get back to me. If this interview does happen, I will post it on the blog.

  8. Jerry
    September 22nd, 2006

    Asif,

    I’m sure you are correct about the sideways movement.  Today was another down day although the volume was lower compared to the previous two up days.  Would I be correct to assume today was mostly profit taking and short coverage? 

    I believe that an interview with the CEO would be a wonderful opportunity for you and give the MED investors some insight into future prospects for the company.  I hope you are successful.

    Thanks again for you insight.

    Jerry 

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