(MP#520) - Income Investors, We Bought This Profitable Dividend Company With The Zero Leverage (NYSE, Consumer Staples Sector) - Seeking Alpha

2/16/24, 1:03 AM (MP#520) _ Income Investors, We Bought This Profitable Dividend Company With The Zero Leverage (NYSE,
e (NYSE, Consumer Staples Sector) _ See…
Value Investor's Stock Club Launch chat
by Value Digger
Value Digger
14.39K Followers
(MP#520): Income Investors, We Bought This

Profitable Dividend Company With The Zero
Leverage (NYSE, Consumer Staples Sector)
Nov. 15, 2023 8:59 AM ET
Dear Valued Subscribers,
Today's pick is our first long idea for November 2023.
Given also that we usually post 2 new long ideas per month, there is more to come by
the end of this month.
Today's pick is from the consumer staples sector (personal care products).
As a friendly reminder, "Value Investor's Stock Club" (VISC) is an "One-Stop" shop

research, because our picks cover the investment needs for different types of investors.
Specifically, our picks are long & short ideas that are coming from 10 sectors, as shown
on the Spreadsheet. When it comes to our long ideas, they are value stocks for large
capital gains and high-yield dividend stocks for income. In other words, no matter what
type of investor you are (i.e. value investor for capital gains, income investor, short
seller), you will find in our research what you are looking for.
Our long idea today is Medifast, Inc. (MED).
MED closed at $66.56 per share yesterday (11/14/2023) and we set the maximum buy
price at $67 per share.
Based on the maximum buy price and quarterly dividend of $1.65 per share (annual
dividend of $6.60 per share), the annual yield is almost 10%.
https://seekingalpha.com/mp/946-value-investors-stock-club/articles/5953141-mp-520-income-investors-we-bought-this-profitable-dividend-company-with-the-zero… 1/15
2/16/24, 1:03 AM (MP#520) _ Income Investors, We Bought This Profitable Dividend Company With The Zero Leverage (NYSE, Consumer Staples Sector) _ See…
Moreover, we believe that the stock has moderate upside potential from the maximum
buy price, so the total return can be much higher than 10%, based on a 12-month
investment horizon.
Key Points
1) Daily volume: The average daily volume for MED in the last twelve months is
approximately 180,000 shares.
As always, we suggest that you place today a GTC (Good-Till-Cancelled) or GTD

(Good-Till-Date) limit buy order at or below the maximum buy price of $67 per share and
wait.
We believe that your order will be executed sooner or later, given also that the market
will remain highly volatile in the next quarters.
If your order isn't executed, don't chase MED higher than the maximum buy price of $67
for two reasons.
First, when it comes to investing, the buy price does matter regardless a company's
market cap (large-caps, mid-caps, small-caps). And the buy price matters, because
investors always need to have downside protection and minimize their downside risk, if
things go unexpectedly wrong for some period of time.
Second, you will have many new choices in the next months.
Specifically, in addition to the upcoming short ideas, we will publish approximately 24

overlooked or undiscovered long ideas from Nov 2023 to Oct 2024 that meet a
combination of strict investment criteria such as rock-solid balance sheet with zero
leverage, profitability, positive OCF, positive FCF, low key metrics, high insider
ownership and growth potential. We emphasize the combination of these investment
criteria for our long ideas because, statistically speaking, this combination offers the
highest upside potential with the lowest investment risk.
Unfortunately, millions of investors have lost billions by buying unprofitable companies

with high debt (high leverage) and/or cash burn and/or high key metrics, because the
stock markets are merciless and punish these companies sooner or later.
Our 24 new long ideas that will be posted from Nov 2023 to Oct 2024 are high-yield
dividend stocks for income and value stocks for large capital gains, based on a 12-
month investment horizon.
Our 24 new long ideas will also come from 10 sectors (i.e. industrial, consumer staples,
consumer discretionary, healthcare, materials, energy, technology, utilities, real estate
etc.), so we will continue to help you diversify your holdings.
We emphasize the sector diversification, because investing only in 1-3 sectors (i.e. real
estate including REITs, financials, materials including gold & silver, industrials including
shipping etc.) is the definition of poor capital allocation that translates into very high
concentration and very high portfolio risk. Given also that the stock market will remain
volatile, the recovery from Coronavirus will be uneven and market rotation is a sure
thing, investing only in 1-3 sectors will result in very low or negative returns in 2024-
2025.
2) Website: The company's website is here.
3) Business overview, as quoted from the annual report:
"Medifast, Inc. is a Delaware corporation, incorporated in 1989.
Medifast is the company behind one of the fastest-growing health and wellness
communities called OPTAVIA. OPTAVIA is a highly effective lifestyle solution for people
for whom diets alone have failed. Medifast sells a variety of weight loss, weight
management and healthy living products all based on our proprietary formulas under the
OPTAVIA, Optimal Health by Take Shape for Life, and Flavors of Home® brands.
OPTAVIA offers clinically proven plans, scientifically developed products and a
framework for habit creation reinforced by independent Coaches and Community
support.
The Company’s product line includes more than 65 consumable options, including, but
not limited to, bars, bites, pretzels, puffs, cereal crunch, drinks, hearty choices, oatmeal,
pancakes, pudding, soft serve, shakes, smoothies, soft bakes, and soups. Medifast’s
nutritional products are formulated with high-quality ingredients. The processing,
formulation, packaging, labeling and advertising of the Company’s products are subject
to regulation by one or more federal agencies, including the FDA, the Federal Trade
Commission (the “FTC”), the Consumer Product Safety Commission, the United States
Department of Agriculture, and the United States Environmental Protection Agency.
As a physician-founded company with a 40+ year history, Medifast is a leader in the U.S.
weight management industry. The company continues to innovate and build upon its
scientific and clinical heritage to deliver on its mission of offering the world Lifelong
Transformation, One Healthy Habit at a Time®.
Medifast was recognized in 2023 by Financial Times as one of The Americas' Fastest
Growing Companies and in 2022 as one of America's Best Mid-Sized Companies by
Forbes. "
4) Seasonality, as quoted from the annual report:
"Demand for weight management products and programs are typically seasonal.
Traditionally, the predisposition of customers not to initiate a weight loss or management
program during the holiday season impacts the fourth quarter with fewer sales of weight
management products and services during these months. January and February
generally show increases in sales, as these months are considered the commencement
of the “diet season” and "resolution season." We believe our sales pattern does not
follow the seasonality of our industry, but rather is predicated on the growth of our
OPTAVIA Coach network."
5) Competition, as quoted from the annual report:
"The weight-loss industry is very competitive and encompasses various weight loss
products and programs. These include a wide variety of commercial weight-loss
programs, pharmaceutical products, surgical interventions, books, self-help diets, dietary
meal replacements, and appetite suppressants, as well as, digital tools, app-based
health and wellness monitoring solutions and wearable trackers. The weight loss market
is served by a diverse array of competitors. Potential customers seeking to manage their
weight can turn to other traditional center-based competitors, online diet-oriented sites,
self-directed dieting and self-administered products such as prescription drugs, over-the-
counter drugs and supplements, as well as medically supervised programs. We also
compete with other direct selling organizations, some of which have a longer operating
history, and greater visibility, name recognition and financial resources than we do.
Medifast’s identified publicly-traded peers and competitors in the general health and
wellness diet industry include USANA Health Sciences Inc., WW International, Inc.
(formerly Weight Watchers International, Inc.), Herbalife Nutrition Ltd., The Simply Good
Foods Co., The Hain Celestial Group, Inc., BellRing Brands, Inc., and Beyond Meat,
Inc."
6) Manufacturing, as quoted from the annual report:
"Jason Pharmaceuticals, Inc., our wholly-owned subsidiary with a manufacturing facility

in Owings Mills, Maryland, is one of the primary manufacturers of our products, which
account for approximately 20% of our total unit sales. We purchased the facility in July
2002 and have gradually increased production capacity and improved overall
efficiencies with additional investments in blending and packaging equipment. Our
Owings Mills manufacturing facility is regulated and inspected by the United States Food
and Drug Administration (the “FDA”), the United States Department of Agriculture (the
“USDA”), the Maryland State Department of Health and Mental Hygiene and Office of
Food Protection. It is certified by the Safe Qualified Food Institute as a Safe Quality
Food Program Level 2 facility compliant with the Global Food Safety Initiative, a global
non-profit collaboration to advance food safety. The remaining 80% of our total unit
sales are manufactured by third-party vendors in accordance with Medifast proprietary
formulas and manufacturing standards."
7) Revenue and profitability: MED has increased its revenue while also being highly
profitable over the last years, as shown here and here.
In the first nine months of 2023, revenue have dropped approximately 30% on a YoY
basis, which has weighed on the stock price. However, MED has remained a highly
profitable company, as linked above.
8) Cash flow: MED has generated positive operating cash flow and positive free cash
flow over the last years, including the first nine months of 2023, as illustrated below (in
thousands):
2022 2021 2020
Operating Activities
Net income $ 143,568 $ 164,031 $ 102,859
Adjustments to reconcile net income to

cash provided by operating activities
Depreciation and amortization 10,980 6,812 4,316
Non-cash lease expense 6,098 5,069 3,189
Share-based compensation 11,053 9,903 6,796
Loss on sale or disposal of property, plant 2,130 2 212

and equipment
Amortization of premium on investment 14 89 320

securities
Deferred income taxes (924) (3,715) 601
Change in operating assets and liabilities:
Inventories 61,187 (126,651) (4,621)
Income taxes 1,373 (945) 5,169
Prepaid expenses and other current assets 97 (9,887) 1,086
Other assets (3,412) (4,543) (2,741)
Accounts payable and accrued expenses (37,594) 54,380 28,010
Net cash flow provided by operating 194,570 94,545 145,196

activities
Investing Activities
Sale and maturities of investment securities 5,267 5,145 4,605
Purchase of property and equipment (16,681) (34,209) (5,887)
Net cash flow used in investing activities (11,414) (29,064) (1,282)
and below (in thousands):
Nine months ended September 30,
2023 2022
Operating Activities
Net income $ 93,380 $ 117,050
Adjustments to reconcile net income to cash provided by operating

activities
Depreciation and amortization 9,754 8,026
Non-cash lease expense 3,532 4,740
Share-based compensation 5,795 8,103
Loss on sale or disposal of property, plant and equipment 622 —
Amortization of premium on investment securities — 14
Deferred income taxes (5,497) (1,746)
Change in operating assets and liabilities:
Inventories 60,629 34,764
Prepaid expenses and other current assets 7,948 1,889
Other assets (4,674) (8,545)
Accounts payable and accrued expenses (35,343) (22,259)
Income taxes payable 989 795
Net cash flow provided by operating activities 137,135 142,831
Investing Activities
Sale and maturities of investment securities — 5,267
Purchase of investment securities (44,779) —
Purchase of property and equipment (5,537) (7,617)
Net cash flow used in investing activities (50,316) (2,350)
9) Market Outlook, as quoted from the annual report:
"Health & Wellness Consumers: We develop and market products for consumers who
want to lose weight and adopt a holistic approach to overall health and wellness.
According to the most recently published data by the Center for Disease Control and
Prevention (“CDC”), over 70% of all adults in the U.S. aged 20 and above were
overweight or obese in 2017-2018, and is growing at approximately 2% per annum.
According to a proprietary analysis, the addressable market for weight loss is large and
growing. It’s worth about $20 billion today with a growth rate of approximately 6% per
annum. Additionally, roughly 75% of the U.S. population above 18 wants to lose weight
and is open to dieting, and approximately 65% of overweight/obese population considers
paid meal plans effective. The total potential pool of OPTAVIA customers is sizable;
there are about 175 million people in the United States looking to lose weight and willing
to consider dieting.
While 81% of U.S. adults have cut spending in the last six months according to the
survey, 70% say they don't plan on letting their health and wellbeing falter. In fact, 57%
saying they would spend more time on their health and wellbeing in the coming year.
We offer customers a radically different approach to health, with weight loss and weight
management serving as a catalyst to an overall improvement in health, confidence,
vitality and general well-being."
10) Growth: We project that these recent growth initiatives will help the company
stabilize its business and gradually return to growth mode in the next years. Specifically:
A) Expansion into $30 billion Sports Nutrition Category with OPTAVIA ACTIVE, as
shown here.
B) Expansion into the Hispanic demographic groups in the U.S., as quoted below:
"The Company is also pursuing expanding the customer base with a focus on Hispanic
demographic groups in the US, where Medifast is underrepresented. To better connect
with this group, we have translated approximately 70% of our main materials and
website into Spanish, and expect to translate the remaining 30% by the end of the year.
In October, in conjunction with National Hispanic Heritage month, the Company
executed its first ever Spanish-language social and digital pilot, intended to build brand
awareness and to learn how to best market OPTAVIA’s clinically proven health benefits
and scientifically developed products, plans, Coaches and community to this growing
demographic. The goal is to leverage the learnings from the social and digital pilot, with
an anticipated larger, more comprehensive media effort to the US Hispanic market in
2024. We believe that advancing our business in the US Hispanic demographic will help
us set the stage for future expansion into Latin America. "
and below:
"The Company’s 2022 OPTAVIA Convention offered a Coach-led educational session in

Spanish, marked by a 100% increase in the number of participants in the session,
compared to the prior year. To support our growing Hispanic Coach community, our
customer support call-center network has a global footprint with infrastructure providing
multi-lingual support from the United States, Guatemala, and Colombia. This has set the
groundwork for both our expansion into other Spanish-speaking communities and our
aspirations of developing other markets around the world. We can clearly see the growth
potential outside the U.S. domestic market and this will be a foundational aspect of our
long-term growth for many years to come, as we look to further our impact and advance
the global health movement."
C) In June 2023, MED announced The Fuel for the Future program, which is intended to
optimize spending through value engineering, operational efficiency and improved
procurement, and is expected to free up capital to invest in growth initiatives and raise
margins. As a part of these efforts and due to economic changes in the Asia-Pacific
region following the COVID-19 pandemic, Medifast exited its operations in Hong Kong
and Singapore as of July 1, 2023. This departure was executed with the intention to help
better prioritize resources that were previously dedicated to these markets in order to
support initiatives that the Company anticipates will have a greater impact on revenues
and profitability. This includes investing in technology and digital capabilities as well as
rolling out product offerings that are complementary to its existing program, bringing
OPTAVIA to new demographics and expanding the Company's total addressable market.
11) Dividend: MED has paid a dividend every year since 2015, as shown here.
https://seekingalpha.com/mp/946-value-investors-stock-club/articles/5953141-mp-520-income-investors-we-bought-this-profitable-dividend-company-with-the-zer… 10/15
12) Dividend sustainability: We project that annual operating cash flow will be at least
$150 million in 2023 and the foreseeable future, based on the company's news.
Based also on the company's reports, we project that CapEx in 2023 will be about $10
million.
Therefore, we estimate that annual free cash flow will be at least $140 million in 2023.
Furthermore, annual dividend payment is approximately $73 million, based on $6.60 per
share annual dividend.
In other words, we project that the annual free cash flow will fully cover the annual
dividend payment in 2023 and the foreseeable future.
After all, we project that the dividend is sustainable in the next years, barring unforeseen
events.
13) Valuation: At the maximum buy price of $67 per share, market cap is approximately
$730 million.
As of Q3 2023, cash & cash equivalents & investment securities are approximately $158
million and interest-bearing debt is zero.
This means that MED has negative net debt (net cash position) of approximately $158
million, so the company has zero leverage.
Therefore, the Enterprise Value is approximately $572 million at the maximum buy price
of $67 per share.
We project that Revenue and adj. EBITDA in 2023 will be approximately $1.1 billion and
$165 million, respectively.
As a result, EV-to-2023 Revenue and EV-to-2023 adj. EBITDA are estimated to be

about 0.5 times and 3.5 times, respectively, at the maximum buy price of $67 per share.
14) The GLP-1 medications: The heightened awareness of weight loss medications
(the GLP-1 medications) such as Ozempic, Wegovy, Saxenda, Alli etc. has recently
raised concerns regarding the weight loss industry including MED's business.
However, FDA-approved weight loss medication has key negatives, so we believe that
the GLP-1 agonists are not going to significantly impact negatively MED's business in
the next years. Specifically, their negatives include:
A) They don't manage weight through changes to one's lifestyle and behavior. As a
result, patients who lost weight while on these medications gain the weight back once
they stop taking them.
B) They have side effects, some of which are severe.
C) They do not come cheap. Specifically, based on GoodRx website, the annual use of
Wegovy costs about $20K, and the annual use of Ozempic costs about $12K.
D) It's unclear whether insurance can cover the cost of such medications, because their
usage can fall under the gray area between something that can be considered as a
cosmetic procedure or medical treatment. And even in the latter case of medical
treatment, the patient who seeks insurance coverage for the use of these medications
has to prove that he has fulfilled many conditions required by the insurer and that the
patient has made reasonable efforts to try other treatment methods or lifestyle changes
prior to using something like Ozempic.
E) They are not available over the counter. They can only be given upon a prescription
by a doctor, so if a person is not diabetic that individual should not be receiving any
prescription to buy the medication.
15) Insider ownership: Insiders own 224,532 shares, or 2.06%, based on the most
recent proxy statement. The value of this stake currently is about $15 million, which is
significant, so we consider insiders' interests to be aligned with shareholders'.
16) Management: When it comes to investing, the company management and the
management competencies do matter.
That said, Dan Chard joined MED as CEO and a board member in October 2016. Under
his leadership, MED has been consistently profitable with revenue soaring 240% to
$934.8 million in 2020 from $274.5 million in 2016. MED's revenue kept rising in 2021
and 2022, reaching $1.5 billion and 1.6 billion, respectively, as shown here and here. On
top of this, MED has maintained a pristine balance sheet with zero debt.
As such, we will give credit where credit is due, and most of the credit goes to the CEO
who owns 131,415 shares, according to the most recent proxy statement. Therefore, we
believe that Dan Chard has been a very successful manager.
17) Institutional ownership: Based on the most recent proxy statement, the beneficial
owners of more than 5% of the company’s common stock are BlackRock Inc., The
Vanguard Group and Renaissance Funds who own 17%, 15.4% and 5.8%, respectively.
Last but not least, the new ideas that will be posted very soon are:
1) A short idea about a highly leveraged and/or grossly overvalued company.
2) A long idea about an undiscovered or overlooked value stock for large capital gains
(value investing).
3) A long idea about an undiscovered or overlooked high-yield dividend stock for your
income portfolio (dividend investing).
Don't miss these new ideas.
The annual fee of $299 for "Value Investor's Stock Club" (VISC) can quite easily be
covered by the gains from only one successful trade, even if you invest a very small
amount per pick (i.e. $1,000 per pick).
Disclaimer: The opinions expressed here are solely my opinion and should not be
construed in any way, shape, or form as a formal investment recommendation. Value
Digger does not accept any liability for any loss or damage whatsoever caused in
reliance upon such information. Investors are advised that the material contained herein
should be used solely for informational purposes. Investors are reminded that before
making any securities and/or derivatives transaction, you should perform your own due
diligence. Investors should also consider consulting with their broker and/or a financial
adviser before making any investment decisions.
Analyst's Disclosure: I/we have a beneficial long position in the shares of MED either
through stock ownership, options, or other derivatives.
I wrote this article myself, and it expresses my own opinions. I am not receiving
compensation for it. I have no business relationship with any company whose stock is
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2/16/24, 1:03 AM (MP#520) _ Income Investors, We Bought This Profitable Dividend Company With The Zero Leverage (NYSE,

e (NYSE, Consumer Staples Sector) _ See…

Value Investor's Stock Club Launch chat

(MP#520): Income Investors, We Bought This

Dear Valued Subscribers,

Today's pick is our first long idea for November 2023.

As a friendly reminder, "Value Investor's Stock Club" (VISC) is an "One-Stop" shop

Our long idea today is Medifast, Inc. (MED).

As always, we suggest that you place today a GTC (Good-Till-Cancelled) or GTD

Specifically, in addition to the upcoming short ideas, we will publish approximately 24

Unfortunately, millions of investors have lost billions by buying unprofitable companies

2) Website: The company's website is here.

3) Business overview, as quoted from the annual report:

"Medifast, Inc. is a Delaware corporation, incorporated in 1989.

4) Seasonality, as quoted from the annual report:

5) Competition, as quoted from the annual report:

6) Manufacturing, as quoted from the annual report:

"Jason Pharmaceuticals, Inc., our wholly-owned subsidiary with a manufacturing facility

2022 2021 2020

Net income $ 143,568 $ 164,031 $ 102,859

Adjustments to reconcile net income to

Depreciation and amortization 10,980 6,812 4,316

Non-cash lease expense 6,098 5,069 3,189

Share-based compensation 11,053 9,903 6,796

Loss on sale or disposal of property, plant 2,130 2 212

Amortization of premium on investment 14 89 320

Deferred income taxes (924) (3,715) 601

Change in operating assets and liabilities:

Inventories 61,187 (126,651) (4,621)

Income taxes 1,373 (945) 5,169

Prepaid expenses and other current assets 97 (9,887) 1,086

Other assets (3,412) (4,543) (2,741)

Accounts payable and accrued expenses (37,594) 54,380 28,010

Net cash flow provided by operating 194,570 94,545 145,196

Sale and maturities of investment securities 5,267 5,145 4,605

Purchase of property and equipment (16,681) (34,209) (5,887)

Net cash flow used in investing activities (11,414) (29,064) (1,282)

and below (in thousands):

Nine months ended September 30,

Net income $ 93,380 $ 117,050

Adjustments to reconcile net income to cash provided by operating

Depreciation and amortization 9,754 8,026

Non-cash lease expense 3,532 4,740

Share-based compensation 5,795 8,103

Loss on sale or disposal of property, plant and equipment 622 —

Amortization of premium on investment securities — 14

Deferred income taxes (5,497) (1,746)

Change in operating assets and liabilities:

Inventories 60,629 34,764

Prepaid expenses and other current assets 7,948 1,889

Other assets (4,674) (8,545)

Accounts payable and accrued expenses (35,343) (22,259)

Income taxes payable 989 795

Net cash flow provided by operating activities 137,135 142,831

Sale and maturities of investment securities — 5,267

Purchase of investment securities (44,779) —

Purchase of property and equipment (5,537) (7,617)