Medifast Slims Down

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March 8, 2007 | SIN Picks | | Author Asif

Just one week after I decided to double our existing position in Medifast (MED) – the weight management company that was originally featured on SINLetter more than a year ago - the stock took a hard hit dropping 14.4% yesterday. Investors lost their appetite for Medifast after the company came out with 2007 revenue and earnings estimates that were well below Wall Street’s expectations.

Clearly I was a little early in adding to our position and the risk of something like this happening was on my mind when I wrote, “Please note that this stock is highly volatile with wild price swings as discussed above. If the forecast for 2007 or 2006 earnings are below expectations, the stock could decline further” in the March 2007 edition of SINLetter. Both my personal portfolio and the SINLetter model portfolio are hurting because of this drop.

So let us deconstruct what happened to the stock yesterday after the company issued its 2007 forecast. A few weeks ago, Medifast increased its 2006 revenue guidance to $73.5 million, up 83% from 2005 but did not change its earnings guidance. Medifast is expected to report earnings of 38 to 40 cents per share when it releases its 2006 results on March 16, 2007. Assuming earnings of 39 cents a share, this will represent earnings growth of over 90% in 2006.

According to the 2007 forecast, revenue is expected to come in between $85 million and $88 million and the company expects to earn between 45 to 46 cents per share. This represents an increase of 17.68% in revenue and a 16.67% increase in earnings if you use the mid-point of their revenue and earnings forecast. While Medifast did not forecast a drop in earnings or even flat earnings for that matter, the rate of growth has slowed down significantly when compared to previous years and hence the drop in the price yesterday.

The forward P/E now works out to 15.41 and given the fact that Medifast usually tends to issue a conservative forecast and then increase its guidance throughout the year, the downside on this stock may be limited. This is just my opinion and there is no way to predict with any degree of certainty how the stock will behave in coming months. I will listen to the conference call announcing fourth quarter and full year 2006 results and will post highlights along with some thoughts on this blog.

While some of our long positions like Diamond Offshore (DO), Intel (INTC) and Tata Motors (TTM) have declined in this market correction, the overall model portfolio continues to hold up well due to astounding gains of 711.11% and 95.12% in our put options on the mortgage lenders New Century Financial (NEW) and Countrywide Financial (CFC).

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