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How Does Medifast's (NYSE:MED) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St
·4 mins read

Those holding Medifast (NYSE:MED) shares must be pleased that the share price has rebounded 38% in the last thirty days. But unfortunately, the stock is still down by 13% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 39% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

See our latest analysis for Medifast

How Does Medifast's P/E Ratio Compare To Its Peers?

Medifast's P/E is 13.52. The image below shows that Medifast has a P/E ratio that is roughly in line with the personal products industry average (12.7).

NYSE:MED Price Estimation Relative to Market May 7th 2020
NYSE:MED Price Estimation Relative to Market May 7th 2020

That indicates that the market expects Medifast will perform roughly in line with other companies in its industry. So if Medifast actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

It's great to see that Medifast grew EPS by 19% in the last year. And earnings per share have improved by 33% annually, over the last five years. With that performance, you might expect an above average P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

So What Does Medifast's Balance Sheet Tell Us?

Medifast has net cash of US$105m. This is fairly high at 10% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Bottom Line On Medifast's P/E Ratio

Medifast has a P/E of 13.5. That's around the same as the average in the US market, which is 14.3. The balance sheet is healthy, and recent EPS growth impressive, but the P/E implies some caution from the market. What we know for sure is that investors have become more excited about Medifast recently, since they have pushed its P/E ratio from 9.8 to 13.5 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Medifast may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.