Thursday, May 14, 2009

Medifast (NYSE:MED): Upgraded to Buy at Canaccord - potential for short squeeze?

Canaccord Adams is upgrading Medifast (NYSE:MED) to Buy from Hold and raising their price tgt to $12.50 from $8 and adding to Best Ideas list.

They believe Medifast’s multi-channel approach to marketing its weight management products and exposure to multi-level marketing (MLM) as a growing sales channel should continue to lead to significant outperformance relative to the broader weight management sector and improve upon a relatively low level of investor recognition. MLM is now approaching 60% of revenue and as a selling channel provides a meaningful counter-balance to a weak economy, facilitates a powerful testimonial-driven sales pitch with ongoing distributor support to drive revenue, and lends itself to an attractive financial model. Medifast’s momentum is very strong with revenue tracking its leading indicators closely, and the leading metrics are sti ll early in an acceleration phase with plenty of room to run. The upstart Medifast Weight Control Centers segment is also enjoying a significant growth phase driven by unit expansion, including franchising and company-operated units.

Canaccord views MED shares as significantly undervalued given the growth rate and attractive financial characteristics. MED trades at just 11x 2009E earnings despite over 70% projected earnings growth and 5x EBITDA.

Next Catalyst
MED shares are likely to be driven by business momentum well beyond the broader weight management or direct selling sectors, and as such quarterly earnings should be the primary catalysts. We expect momentum in sales, EPS and leading indicators to drive the shares into and beyond Q2 results in early August.

Notablecalls: A controversial name with some shorts on board will probably create some nice upside. I'm guessing 10%+ if the market holds (just a guess - fyi).

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