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Why Medifast Stock Jumped 46% in May

By Demitri Kalogeropoulos - Jun 8, 2021 at 9:54AM

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Market-thumping sales growth is holding up through early 2021.

What happened

Medifast (MED 1.98%) shareholders beat the market by a wide margin last month. Their stock rose 46%, compared to a 0.55% uptick in the S&P 500, according to data provided by S&P Global Market Intelligence.

The rally pushed the health-and-wellness platform to an over 50% gain so far in 2021. Shares have risen by more than 160% in the past full year.

A young woman jogging over a bridge.

Image source: Getty Images.

So what

Investors cheered Medifast's early May earnings report that showed robust demand for its Optavia products and services. Revenue rose 91% as people flocked to its diet and exercise platform.

Interest in the category spiked during the pandemic and hasn't waned as of early 2021. "This has been an exceptional quarter of growth and productivity," CEO Dan Chard said on May 4. "Consumer interest in health and wellness remains high," he explained, "and the strength of the Optavia coach-based model...has continued to attract robust numbers of new clients."

It wasn't all good news in the report, though. Medifast couldn't handle all the demand for its meal products, for example, which forced the company to rely on outside producers. Shipping bottlenecks required higher spending on air freight, too. Together, these trends pushed gross profit margin down to 73% of sales, compared to 76% a year ago. Normally, investors would expect to see profitability increase at a time of outsized sales gains.

Now what

Still, last month, Wall Street focused its attention on sales growth, which is clearly on a positive path. Chard and his team are predicting revenue this year to land between $1.4 billion and $1.48 billion, compared to $935 million in 2020. The company is hoping its coach-based selling approach, which differs from traditional diet programs, will allow it to sustain its platform in a competitive niche. "We are executing on a series of initiatives to support our repeatable business rhythm," executives said in a conference call last month.

It will be some time before investors can judge whether those initiatives are working, Meanwhile, they'll be looking for signs that management is making progress at reversing Medifast's falling profit margins. But the stock might continue rising despite these challenges if sales growth continues to outpace the wider health-and-wellness industry.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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