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I feel FitLife Manufacturers, Inc. (OTCPK:FTLF) is at an inflection level. That is regardless of seemingly all the time being at an upward inflection level given the inventory’s rise over the previous 5 years.
The inventory has been comparatively flat because the finish of final yr as they’ve been shifting to extra of a web-based gross sales technique and as they’ve been integrating their current acquisition, Mimi’s Rock Corp (“MRC”). Earnings have been lumpy due to these elements, and traders are ready to see how these enterprise modifications play out.
I feel the outcomes of those modifications will come quickly, and I feel they are going to be superb for the enterprise. A bigger proportion of income coming from on-line gross sales will result in greater margins and smoother earnings over time. The profitable integration of MRC can even result in a big enhance in earnings per share, because the acquisition was not paid for with FitLife shares, however was funded by money and a few debt. I feel this debt can be paid off shortly because the enterprise is capital mild and converts earnings to free money circulate effectively.
The complement market in North America has additionally grown considerably and is forecasted to develop considerably into the longer term. It will present tailwinds for FitLife as the present enterprise story performs out. I personally am not a believer within the efficacy of most dietary supplements, however this development cannot be ignored.
On prime of this, the corporate lately utilized for uplisting to the Nasdaq change. I’ll go into extra element beneath, however it will probably be a catalyst if the above initiatives are profitable. If they’re, I estimate the inventory to be buying and selling at 9x 2024 earnings, which is reasonable contemplating its historical past of excessive ROIC and earnings development.
On-line Gross sales
The primary initiative that FitLife has been specializing in for a while is having a bigger portion of its income come from on-line gross sales. Full yr 2022 on-line gross sales have been 28% of income in comparison with 24% within the prior yr, however the development has been accelerating. On-line gross sales grew by 25% yr over yr in Q1 2023 whereas wholesale income grew 6% yr over yr. The principle advantage of extra on-line gross sales is smoother income and earnings, as wholesale income might be lumpy relying on timing of shoppers restocking stock and timing of supply of stock.
This lumpiness most clear from This autumn 2022 earnings outcomes as whole income declined 25% year-over-year on account of wholesale income declining 39% yr over yr. Administration encourages gross sales of its merchandise to shoppers as a greater indicator of the corporate’s wholesale income. In that quarter, gross sales to shoppers solely declined by a low single digit proportion.
Having smoother earnings doesn’t essentially change the economics of the enterprise over the long run, however it does make it simpler for analysts to forecast earnings. Funds that want to keep away from volatility in earnings and within the inventory, worth could also be extra probably to purchase the inventory if earnings are extra predictable.
Additionally, for FitLife particularly, extra on-line gross sales diversifies income away from GNC. GNC accounted for 71% of income in 2021, and 67% in 2022. I don’t assume this can be a large danger as GNC is a well known model that has been round for a very long time, but when GNC gross sales have been to say no materially, it would have an effect on FitLife.
Valuation and Integration of MRC
FitLife’s acquisition of MRC was consummated on February 28 and contributed $2.6m in income within the first quarter. Whole income for the quarter elevated 47% yr over yr due to this. Regardless of this enhance in gross sales, earnings declined over 50% on account of, in keeping with administration, non-recurring bills from the acquisition. Adjusted EBITDA for the quarter, which excludes these bills, elevated 30% yr over yr to $2.2m.
Of this enhance in adjusted EBITDA, $0.4m got here from MRC, which solely contributed to the enterprise for rather less than half of the quarter. For a full quarter, I might assume about $0.8m in adjusted EBITDA would come from MRC. This might have meant $2.6m in adjusted EBITDA for the quarter. Including again internet curiosity expense, tax expense, and depreciation and amortization would result in $2.1m of internet earnings, and a internet earnings margin of 19.6%. Annualized, internet earnings could be $8.4m.
FitLife’s totally diluted market cap is $81m, that means the inventory is at the moment a bit beneath 10 instances a tough estimate of 2023 earnings. Given the historical past of natural development, the fast enhance in on-line gross sales, and the expansion of the complement market in North America, I might estimate FitLife income grows 10% in 2024 to $47m. Utilizing my estimated 19.6% internet earnings margin from Q1, internet earnings for the complete yr could be $9.2m. With 4.9 m totally diluted shares as of Q1 2023, my estimate of 2024 EPS is $1.86 which leaves the inventory buying and selling at 9x ahead EPS.
This appears low-cost given the historical past of 25%+ ROIC, the historical past of earnings development, and administration that’s competent, aligned and returning capital to shareholders. If these elements stay steady into the longer term, the inventory appears very low-cost and will present nice returns for shareholders.
Catalysts
The estimate above assumes the mixing of MRC goes to plan, which isn’t a assure. Nevertheless, the administration staff has a historical past of remarkable enterprise efficiency and the CEO is clearly competent given the truth that he presided over FitLife’s turnaround, which led to the inventory’s meteoric rise. It’s troublesome to know the main points of this integration, so at a sure level, those who personal shares should belief that the administration staff can be profitable. If traders don’t have this belief, then it might be greatest to promote their shares.
On the very least, plainly the administration staff consider they are going to be profitable. Just lately, the CFO made an open market purchase of 1000 shares at a worth of $17 per share. This isn’t an enormous quantity, however it elevated his possession by about 40%. Together with this, the corporate lately utilized to be listed on the Nasdaq change, which might enhance the inventory’s liquidity. I consider the corporate has been postponed repurchasing shares for this, as being listed on the Nasdaq change would make it simpler to take action with out affecting the share worth.
I feel this is able to result in a number of growth as extra funds would be capable of personal the inventory, and a premium could be utilized as a result of firm actively repurchasing shares. Moreover, the discount in shares would increase EPS, which might additionally assist the inventory.
Dangers
FitLife is an illiquid inventory that trades about $30 thousand price of shares per day on common. The inventory is illiquid due to its small market cap, the truth that it trades over-the-counter and due to its low float as a result of CEO Dayton Judd proudly owning the majority of the fairness by means of direct possession and thru Sudbury Capital Administration, the hedge fund during which he’s managing companion.
The corporate did apply to be listed on the Nasdaq change, which might enhance liquidity. Whereas there isn’t any assure the appliance can be accepted, FitLife does meet the necessities to be listed on the change.
FitLife’s combination earnings over the previous 3 years simply topped $11m, and the bid worth is effectively over $4. Being listed on this change would enhance liquidity, however it might nonetheless be a comparatively illiquid inventory given the market cap. This makes it troublesome to promote shares shortly with out bringing the inventory worth down if an investor has a sudden want for money. The easiest way to manage for this danger is to maintain the place dimension small or not make investments in any respect until you could have a really long-term holding interval in thoughts.
The danger of not integrating MRC efficiently stays. It’s troublesome to know if that is going effectively until you could have an inside take a look at the enterprise, which exterior shareholders is not going to. Buyers should perceive the administration staff and their historical past to find out the possibilities of success.
Remaining Ideas
I’m estimating that FitLife’s inventory is buying and selling at 9x 2024 earnings, assuming the profitable integration of Mimi’s Rock Corp. Clearly, if the non-recurring bills find yourself being a bit extra recurring, the inventory isn’t as low-cost. Given present administration’s historical past of success with the enterprise, and their confidence as gauged from current CFO open market purchases and the extension of the share repurchase program, I’m personally betting that this can be profitable.
Together with the earnings development that I consider will come from this acquisition, the returns for shareholders could also be juiced if the appliance to be listed on the Nasdaq change is accepted. With this, the corporate will be capable of repurchase shares extra successfully and the inventory might even see a number of growth as funds that may not be capable of shares that commerce over-the-counter will be capable of make investments.
These subsequent 6–12 months can be pivotal for FitLife as many modifications to the enterprise turn into settled. Whereas there are uncertainties, I’m betting that these modifications will result in greater earnings per share and better investor curiosity within the inventory.
Editor’s Observe: This text discusses a number of securities that don’t commerce on a serious U.S. change. Please pay attention to the dangers related to these shares.
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