Can These Marketers Get Your Portfolio in Shape?
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The fundamentals in the weight management business have never been better, given the population’s need for some personal downsizing. According to the U.S. Centers for Disease Control (CDC), seven out of ten adult Americans are overweight, with 80 million people falling into the obese category. While the drug industry continues to search for a magic pill to counter the problem, the weight management industry sells better nutrition and lifestyle changes through their products. So, which companies are worth a look?
Medifast (NYSE: MED)
The Maryland-based weight loss company’s 5&1 Plan has been on a winning streak, with a 250.8% gain in sales over the past four fiscal years. Medifast’s basic premise is for customers to eat five of its specially packaged meals each day, as well as one freshly prepared meal that has a good balance of protein and non-starchy vegetables. The company sells the majority of its products through “health coaches,” with more than 10,800 of them as of September 2012.
In FY2012, Medifast reported a 19.6% increase in total sales, as it introduced new products and its independent sales force generated higher average sales. However, the company’s operating income fell 9.7% due to the cost of its various expansion activities. Despite a growing online segment, Medifast has been building a retail presence through a network of weight loss centers, in order to counter the retail outlets of its competitors.
With an estimated $61 billion in annual sales for the weight management industry, Medifast has significant growth opportunities if it can keep recruiting and motivating its independent sales force. While the company has achieved growth in online and retail segments, its direct selling organization still accounts for the majority of its annual sales. Acknowledging the importance of health coaches to its overall success, Medifast has been upgrading training tools and providing compensation structures that should keep its sales force going strong. As long as its products continue generating results, Medifast should deliver for investors.
Weight Watchers International (NYSE: WTW)
The New York-based company is the world’s largest weight management specialist, with 50 million members and 45,000 meetings each week. Unlike most weight loss companies, though, Weight Watchers is primarily a service organization that provides information, tools, and advice through its weekly meetings. Its PointsPlus system creates point values based on a meal’s protein, carbohydrate, fat, and fiber content, which are then used by customers to make intelligent eating choices.
In FY2012, Weight Watchers had a fairly rough year, with flat revenue growth and a 9.2% decrease in adjusted operating income. While total paid weeks of the company’s programs grew by 9% due to growth in the online segment, the average weekly attendance at its live meetings fell by over 6 million customers. In addition, Weight Watchers reported revenue declines in its products division, which sells a variety of licensed products including baked goods, cookbooks, and restaurant guides.
Weight Watchers’ previous recapitalization leveraged its balance sheet, with $2.3 billion of funded debt as of December 2012. Despite a reasonable P/E multiple around 10, the company is much more expensive when factoring in its debt load, which probably accounts for its poor stock price performance over the past year. Weight Watchers has significant work ahead to reinvigorate growth and improve its financial position.
Herbalife (NYSE: HLF)
The global marketer of nutritional and weight loss products has been in the news lately for all the wrong reasons. Within the past month, the company has revealed an SEC inquiry into its operations, has recalled certain of its products due to allergy concerns, and has been the subject of a public feud between hedge fund managers over whether the company is a pyramid scheme. The combination of effects has been hard on investors, leading to weak stock price performance over the past year.
In FY2012, Herbalife reported solid financial results, with increases in revenues and operating income of 17.9% and 17.6%, respectively, versus the prior year. The company’s sales growth benefited from its global reach, with strong, double-digit sales gains in the Asia-Pacific and Latin America regions. Herbalife was also able to continue recruiting and retaining a productive independent sales force in 2012, with an 18% increase in active resellers of its products.
Despite the risks of its business model, Herbalife has strong operating cash flow and a solid balance sheet. The company is also making investments to increase its product manufacturing capacity, with the goal of manufacturing roughly 65% of its product line over the next few years. Once Herbalife improves its financial reporting and overall transparency, it has the makings of a great investment story.
The bottom line
The weight loss industry is a tough place to do business, with short shelf lives for products and heavy marketing expenditures. Investors should stick with the companies that selling not just a product, but a way of living. Of the three players, only Medifast is delivering for investors and is one for the portfolio.
rghanley owns shares of Medifast. The Motley Fool has the following options: Long Jan 2014 $50 Calls on Herbalife Ltd.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!