Many of the stocks of our Fastest-Growing companies appear to be "priced for perfection" -- meaning that a slight misstep could send them tumbling. Not Medifast, whose shares have fallen 44% this year. "The stock's priced for failure," quips analyst John San Marco of Janney Montgomery.
Medifast is a weight-loss company whose program costs about $300 for counseling and a month's supply of low-fat, low-sugar shakes, bars, and meals. The plan has been sufficiently popular and effective -- one clinical study found Medifast dieters lost 12% of their initial body weight after 16 weeks, vs. 7% for dieters consuming regular food -- that Medifast has been able to quadruple its net income since 2008.
Historically the Medifast program has been sold by neighborhood "coaches" -- think Avon ladies hawking diet plans -- who collect commissions on products sold and bonuses for new customers acquired. The more coaches Medifast signs up, the more food it can sell -- which is why a recent deceleration in the growth rate of Medifast's coaching ranks (from 50% last year to a projected 33% in 2011) has spooked Wall Street.
Analysts blamed a rejiggering of Medifast's training program for the slowdown in the growth rate of the coaching ranks. This July's relaunch of the coach-training website may well fix the problem. But from an earnings perspective, the timing of the slowdown could hardly have been worse. Medifast's profits were already taking a hit from the company's investment in new retail clinics and storefronts. Canaccord Genuity analyst Scott Van Winkle thinks the clinics will pay off eventually, but in the near term he thinks construction, staffing, and other related costs will be a drag on Medifast's earnings through mid-2012.
As with Broadcom, we'd be more concerned about all this if the stock weren't so cheap. Even after analysts lowered their earnings estimates -- the Street is now projecting 13% EPS growth this year and 21% next year -- Medifast is trading at a mere 11 times trailing earnings. That compares to a P/E of 16 for rival Nutrisystem, whose earnings are expected to decline 42% this year. Given Medifast's low valuation compared to the size of its potential market -- since 2005 the obesity rate for U.S. adults has increased from 24% to 34% -- we're betting on a rebound.
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