Issue 39: Medifast $MED

Betting against Buffett. A deep value turnaround opportunity with associated "hair".

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Join me on Friday, July 12 at 11 am EST for a private Google meetup to discuss this issue and more. The link to the meeting is at the end of this post.

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Introduction

It’s not often I bet against Warren Buffett.

Medifast ($MED | Disclosure: Long), which came on my radar through the Russell Microcap Rebalancing Project, might not be a direct bet against Buffett, but it certainly goes against his counsel to avoid turnarounds.

Both our operating and investment experience cause us to conclude that “turnarounds” seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price. 

-Warren Buffett, 1979 Chairman's Letter

In buying shares I think this situation is different. MED’s turnaround isn’t in turning around a poor business (Buffett was referring to the Waumbec Mill acquisition, which was decidedly a business in decline) but in adapting an existing business to a new operating environment.

Nutritional weight loss products, like that of MED’s well-known competitors, Weight Watchers and Jenny Craig et al, are under threat from new weight-loss drugs known as GLP1s.

What I like about MED is:

1. Its highly variable cost structure should allow it to survive a significant drop in sales

2. Net cash and investments of over 50% of its market cap

3. A deeply pessimistic/uncertain outlook

My thesis rests on an expectation that the outcome will be binary: either these new drugs put the entire weight loss industry out of business or it exists in some form and MED survives and/or successfully adapts.

Industry Overview

The structured weight loss market in which MED competes was an $8 billion market within the $20 billion overall weight loss market. I must emphasize was, since these markets are under mortal threat from GLP1s, a class of weight loss drugs that include Ozempic, Wegovy, and Saxenda (all manufactured by Novo Nordisk), as well as others produced by Eli Lilly (Zepbound), AstraZeneca, and Sanofi. These drugs have grown into a $9 billion+ market in the US with expectations of growing 20%+ through the 2030s.

All of this has led the weight loss industry to change tack and look for ways to survive alongside GLP1s by buying or partnering with a telehealth provider. The idea is to be the preferred nutritional product manufacturer recommended alongside the GLP1 prescription.

Weight Watchers International (WW | Disclosure: None) spent $132 million to buy Sequence, a subscription-based telehealth provider specializing in weight management.

MED went another route and partnered with¹ LifeMD (LFMD | Disclosure: None), a virtual primary care provider with a weight management program. MED gets referrals from doctors prescribing nutritional products and coaching alongside the GLP1s, and LifeMD gets a $20 million investment and a system of support for its patients.²

Right now at least, doctors recommend some sort of program to ensure weight loss comes from fat, not muscle. That could change if Eli Lilly is successful in developing a new drug that would preserve muscle mass during weight loss, an issue with current GLP1s (WSJ Article).

This additional threat has led MED to attempt entry into the $30 billion (MEDs estimate) sports nutrition market.³

Source: Medifast Q1 presentation

A fat opportunity…

Take your pick of the statistics. Anywhere from a third to 40% of the US population is classified as obese. That’s a lot of weight to lose.

My gut (no pun intended) tells me there’s room for the nutritional weight loss market alongside the new market for weight loss drugs. A few reasons:

1. The current shortage of GLP1 drugs means not everyone has access to them

2. The cost of GLP1s, even with insurance, might keep them out of reach of some individuals

3. A better GLP1 like Lilly’s might not materialize, or it could have other side effects

4. Long-term use of GLP1s might not be desirable, economic, or prudent. Keeping weight off will require ongoing effort and a change of habits, requiring companies specializing in more holistic solutions

Source: Cato Institute

Business Model