Weight loss is Medifast's gain

Owings Mills company sees rapid growth but volatility on Wall Street

  • Michael S. McDevitt, CEO of Medifast Inc.
Michael S. McDevitt, CEO of Medifast Inc. (Baltimore Sun photo by Barbara…)
April 04, 2011|By Gus G. Sentementes, The Baltimore Sun

As more than a third of Americans struggle with obesity, Medifast Inc. has seen skyrocketing sales of its weight-loss food products in recent years. Business has been so good that the firm topped Forbes magazine's list of the top 100 fastest-growing small public companies in the nation last year.

But last month, Medifast, based in Owings Mills, warned that it had to delay its fourth-quarter earnings report to reconcile accounting snafus involving expenses — an uncommon move that typically raises concerns among shareholders and analysts. A sell-off by spooked investors drove the stock down by nearly a quarter of its value. Meanwhile, more than a dozen law firms have trawled for angry shareholders and some have filed class action lawsuits.

When Medifast finally posted fourth-quarter results last week, the company revealed significant growth in sales and profits — but they were short of what Wall Street analysts expected. And the company also adjusted downward its expectations for its first quarter this year. The result: The stock has gotten punished again.

After reaching a 52-week high of $36.78 in May last year, shares of Medifast dropped 8 percent Monday to close at $16.58.

Like a dieter who watches his weight yo-yo up and down, Medifast has experienced volatility on Wall Street. But Michael McDevitt, Medifast's chief executive officer, said in an interview that he wouldn't have handled the delay any differently, despite knowing that it could lead to investor concerns and possible lawsuits.

"We're trying to be as transparent as possible," McDevitt said. "There comes a time when you need to stay quiet and get your work done. I was excited to get the real news out there."

Medifast is a three-decade veteran in the weight-loss industry, though it has seen particularly rapid growth in the past 10 years. It employs 500 people in Maryland and has its headquarters and food production facility in Owings Mills, where it makes meal bars, powdered shakes and other diet foods. It also has a distribution facility on the Eastern Shore.

The company, founded by a doctor in 1980, competes against other firms that sell food and meal replacement products and weight-loss regimens, such as Weight Watchers International Inc. and NutriSystem Inc. Last year, Weight Watchers had $1.5 billion in revenue, while NutriSystem had $510 million.

Medifast operates in several markets across the United States but remains more of a regional player compared to its larger rivals. Its revenue last year was $257 million — a 52 percent jump from $170 million in 2009. Profits increased by 72 percent, to $19.6 million last year, from $11.4 million a year earlier.

Medifast's investors and analysts have grown accustomed to rapid growth from quarter to quarter in recent years. But when the announcement came last week that growth was slowing, many shareholders pulled out of the stock and are now sitting on the sidelines, waiting for things to settle down, according to Kurt M. Frederick, an analyst with Wedbush Securities.

Analysts were expecting around $80 million in revenues for the first quarter this year, but Medifast said it anticipated $73.5 million to $74 million. The news followed the release of fourth-quarter revenues, which were also below analysts' expectations.

"People are expecting more growth," Frederick said. "A lot of investors are ... dumping and waiting to see before they jump back into it."

Scott Van Winkle, an analyst with Canaccord Genuity, said in a research note that Medifast is "the best growth stock in the diet industry for the last few years," but that the company "isn't as respected by investors as much as its larger peers are."

He noted that Medifast had to restate earnings last year, which shook investor confidence then, too.

Still, some major investors have significant stakes in the company. Boston-based Fidelity Investments, the large discount brokerage and mutual fund firm, holds 10 percent of Medifast's shares. Two New York-based firms also own big pieces of Medifast: BlackRock Inc., the world's largest money manager, owns 7.5 percent, and Ionic Capital owns 5.7 percent.

Medifast hired a new accounting firm that many expect will help the firm sort out its financial reporting processes to the satisfaction of Wall Street.

"Even as profits and revenues continue to grow, the Owings Mills company is getting a tough workout on Wall Street at the moment," Van Winkle wrote in his research report.

Eagle-eyed investors and analysts aside, the company has a steady stream of enthusiastic customers. Medifast's food and diet systems, the company says, have been recommended by 20,000 physicians and the company counts more than a million clients.

Participants eat five Medifast meals a day, plus one "lean and green" meal that typically features a portion of meat and sides of vegetables.

Neal Moorhouse, 30, of Baltimore started a Medifast diet Dec. 1, after his weight climbed to 267 pounds on his 5-foot, 8-inch frame. He spends about $200 a month — after rebates — on Medifast meals.

He said he has lost 57 pounds since then, 20 of them in the first month. He said he has more energy and has started exercising three or four times a week. And, he believes his slimmer profile helped his love life — he now has a girlfriend whom he started dating a few months ago.

"I've been single for a long time," Moorhouse said. "I didn't lose the weight because I didn't like my weight. I did it because I was unhealthy. I started losing all this weight and started getting all this attention."



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