|
Published: July 6, 2010
Back in May,
I wrote about an unfortunate trend . America is
getting fatter. The other unfortunate trend is that people
generally fail when it comes to dieting.
Although I can't say dieting is an addiction like smoking, I can
say that dieters, like smokers, just can't quit. That's great
for any company designed to take advantage of this
semi-addiction. And there's more than just one company that has
figured out to profit from it.
We know that products that take advantage of human weakness are
big business. Altria (NYSE: MO) and Starbucks (Nasdaq:
SBUX) have proven this concept. Even better are products
that take advantage of failure.
Dieters are prone to failure because there are so many
obstacles. Think about the percentage of people you know,
including yourself, who have tried a diet and succeeded. Not
many, right?
The truth is, the key to becoming a successful diet company
isn't ensuring that people succeed with your product -- it's
just that they keep buying it. It's all about marketing and
becoming a recognized global brand. If a company can deliver the
message that their plan will succeed where others won't, and do
it convincingly, that's 90% of the battle. The rest is about
having good customer service and good quality products.
Medifast (NYSE: MED), my other weight-watching discovery,
has a lot going for it over other plans.
The company has actually gone to the trouble of having clinical
studies done by researchers at Johns Hopkins. This physician
seal of approval is critical because it bolsters another, more
subtle, aspect of Medifast's success: Fear. Most of us are
obsessed with health. We know obesity is a major factor in
cardiovascular disease and cancer. We think about this every day
and we all want the miracle diet to keep us safe. This is why
these plans will always be in existence, fighting for
market share.
I like Medifast for all of these macro reasons. In addition, the
company has a 30-year track record. It has achieved that elusive
brand-name status. Investors may be interested to know that much
of senior management is comprised of former military members.
This means investors should be able to count on a deliberate
approach to success, along with carefully considered strategic
moves and a great deal of precision regarding operations. It's
also comforting to know that insiders hold 27% of the shares.
This kind of approach may not mean the company explodes the way
Weight Watchers (NYSE: WTW) has, but that's fine with me.
The stock has still had an extraordinary performance. And yet
still with a market cap of about $460 million, that's only 25%
the size of Weight Watchers.
The most incredible thing about Medifast is that even during
this awful recession, net earnings for 2009 soared +150%
year-over-year, on a +57% increase in revenue. The first quarter
for 2010 continued the trend.
Free cash flow during the past four quarters comes in at just
more than $22 million. As for debt, the company is true to its
product -- it runs very lean with only $5.2 million, compared to
nearly $21 million in cash and equivalents. This only serves to
prove that the macro concept works -- good economy or bad,
people will spend money to lose weight.
Action to Take --> I still
love the Nutrisystem (NYSE: NTRI) story, but I love
Medifast just as much. I'd be comfortable owning both over
Weight Watchers, which has been struggling for the past several
years. If you believe Medifast could become as big as Weight
Watchers one day, as I think could happen, then that means
Medifast could be a 4-bagger going forward.
-- Frederick Steier
Contributor
StreetAuthority |
