LFVN - LifeVantage: Dividend Pristine Balance Sheet Strong Upside Potential

2023-05-10 09:00:00 ET

Summary

• LFVN maintains a pristine balance sheet and currently trades with very low key multiples.
• Thanks to last week's dividend hike, the dividend yield is undoubtedly good.
• Outlook is bright thanks to the recent growth initiatives such as the Evolve compensation program and many new products in new markets including TrueScience Liquid Collagen.
• After all, I believe that LFVN stock has solid potential for significant capital gains in the next months, based on its current price levels.

A good dividend yield is welcome. But if the stock drops more than the dividend yield, the net result is negative. This is why investors always want to combine the good dividend yield with the capital gains. And I believe that this could be the case for LifeVantage ( LFVN ) in the next months.

LFVN is an undiscovered stock because there are not any articles about it since September 2022. And I always like investing in undiscovered stocks with strong fundamentals, low key multiples and positive outlook, because these factors are crucial when it comes to the capital gains.

Business Overview

LFVN is engaged in nutrigenomics targeting health-conscious and wellness-oriented consumers who also want to achieve their financial goals. According to the company's website :

Nutrigenomics is a science dedicated to cracking the human aging code that studies how nutrition and naturally occurring compounds affect human genes to support good health."

As linked above, the company's products are non-GMO and have no artificial flavors, colors or sweeteners. They have no parabens either. Here are more details about the company's products, as quoted from its latest report :

LFVN provides quality, scientifically-validated products to customers and independent consultants as well as a financially rewarding commission-based direct sales opportunity to its independent consultants. Its products are nutrigenomic activators, dietary supplements, nootropics, pre- and pro-biotics, weight management, skin and hair care, bath & body, and targeted relief products.

Specifically, LFVN’s line of scientifically-validated dietary supplements includes its flagship Protandim® family of products, LifeVantage® Omega+, ProBio, IC Bright®, Daily Wellness, Rise AM, Reset PM, and D3+ dietary supplements. TrueScience® is the Company's line of skin, hair, bath & body, and targeted relief products. It also markets and sells Petandim®, its companion pet supplement formulated to combat oxidative stress in dogs, Axio® its nootropic energy drink mixes, and PhysIQ, its smart weight management system."

Pristine Balance Sheet And Profits

LFVN is debt-free with $19.5 million in cash as of March 2023 . This is a key starting point for me, because I like investing in companies with zero leverage, and I avoid or even short the highly leveraged names.

When it comes to the revenue, LFVN is not fully dependent on North America, but it has presence in many countries around the world with revenue breakdown by geographic region in the first nine months of FY 2023 being illustrated below (in thousands):

Due largely to the negative impact of COVID-19, revenue have largely stayed flat slightly above $200 million over the last years. However, the company has been consistently profitable, although net income dropped in FY 2022 compared to prior fiscal years due largely to inflationary pressures, as shown here and here .

More importantly, things have started to change for the better in Q3 FY 2023 . Specifically, the company announced a slight increase in revenue on a YoY basis while maintaining its high gross profit margins, as quoted below:

Our gross profit percentage for the three months ended March 31, 2023 and 2022 was 80.2% and 80.7%, respectively. Our gross profit percentage for the nine months ended March 31, 2023 and 2022 was 79.7% and 81.5%, respectively. The decrease in gross margins, as compared to the prior year periods, is primarily due to increased shipping to customer expenses during the current year period as well as shifts in geographic and product sales mix."

When it comes to its profitability, LFVN was profitable in Q3 FY 2023, although its net income was down about 10% compared to prior year period, as linked above.

However, the improvement on the top and bottom lines is more obvious on a sequential basis, as illustrated below (in millions):

Source: The company's reports

On top of this, the sequential improvement in net income and adj. EBITDA will continue in Q4 FY 2023, because LFVN expects that its adj. EBITDA will be about $5.1 million in Q4 FY 2023, based on the latest guidance below (emphasis added):

2023 Outlook : The Company expects to generate revenue in the range of $209 million to $212 million in fiscal year 2023 and adjusted EBITDA of $11 million to $13 million, with adjusted earnings per share in the range of $0.20 to $0.26, which assumes a full year tax rate of approximately 37%. This guidance reflects the current trends in the business. The Company’s guidance for adjusted non-GAAP EBITDA and adjusted non-GAAP earnings per diluted share excludes any non-operating or non-recurring expenses that may materialize during fiscal 2023. The Company is not providing guidance for GAAP earnings per diluted share for fiscal 2023 due to the potential occurrence of one or more non-operating, one-time expenses, which the Company does not believe it can reliably predict."

When it comes to the cash flow, LFVN has consistently generated positive operating cash flow and positive free cash flow since 2020 despite the negative impact of COVID-19, as shown here .

Moreover, LFVN generated positive operating cash flow and positive free cash flow in the first nine months of FY 2023, with significant sequential improvement this fiscal year, as illustrated below (in millions):

Source: The company's reports

In other words, things are getting better on the cash flow front on a sequential basis. And I project that this positive trend will continue in the next quarters thanks also to the fact that LFVN expects its adj. EBITDA to be about $5.1 million in Q4 FY 2023, based on the latest guidance above.

Low Valuation

At the current price of $3.80 per share, market cap is approximately $47.5 million. As of Q3 FY 2023, cash & cash equivalents are approximately $19.5 million and interest-bearing debt is zero. This means that LFVN has negative net debt (net cash position) of approximately $19.5 million and the Enterprise Value currently is approximately $28 million.

Based on the company's guidance, revenue and adj. EBITDA in FY 2023 will be approximately $210 million and $12 million, respectively. As a result, EV-to-FY 2023 Revenue and EV-to-FY 2023 adj. EBITDA are estimated to be only 0.1 times and 2.3 times , respectively, at the current price of $3.80 per share. Therefore, it's obvious that LFVN has very low key multiples, so it has strong potential for big capital gains in the next months.

Outlook And Growth Initiatives

Outlook is bright, because LFVN has taken several growth initiatives over the last quarters with the most recent ones being:

1) It entered the Philippine market, as quoted below:

Global Expansion: To further support our global expansion initiative, we expanded our business operations to Philippines in fiscal year 2022."

2) It launched TrueScience Liquid Collagen in the U.S. in June 2022. And this new product has significantly exceeded expectations fueling an increase of over 300% in monthly skin care revenue for LFVN, as quoted below :

Since its initial U.S. launch in June 2022, TrueScience® Liquid Collagen has significantly exceeded expectations and fueled an increase of over 300% in monthly skin care revenue for LifeVantage . This growth reflects significant increase in both the number of Customers as well as subscription rates for LifeVantage skin care products.

TrueScience® Liquid Collagen is a unique beauty-from-within supplement featuring the rare Ruby Red Quinoa Extract (Chenopodium formosanum), ethically sourced fish collagen, and a berry + citrus blend utilizing a differentiated three-way approach to activate the body’s natural production of collagen, replenish depleting levels of the protein, and maintain collagen levels in the body. As an added benefit, the ingredients in TrueScience® Liquid Collagen also help protect against the damaging effects of oxidative stress, caused by free radicals. One of the key ingredients has been clinically shown to increase antioxidant levels by up to 202% as well as increase the activation of superoxide dismutase gene expression by 27 times."

And this commercial success was recently coupled with the fact that TrueScience® Liquid Collagen was named a recipient of the Bronze Stevie® Award in the Consumer Product category in the 21st Annual American Business Awards® among more than 3,700 nominations from organizations of all sizes and industries, with LFVN emphasizing that this product is unlike any other collagen product on the market, as quoted below (emphasis added):

TrueScience® Liquid Collagen is unlike any other collagen product on the market. While other formulas focus on supplementing collagen levels in the body, Liquid Collagen is a unique beauty-from-within product featuring the rare Ruby Red Quinoa Extract (Chenopodium formosanum), ethically sourced fish collagen, and a berry and citrus blend that utilizes a differentiated three-way approach. The proprietary product activates the body’s natural production of collagen, replenishes depleting levels of the protein, and maintains collagen levels in the body. As an added benefit, the ingredients in TrueScience® Liquid Collagen also help protect against the damaging effects of oxidative stress, caused by free radicals. One of the key ingredients has been clinically shown to increase antioxidant levels by up to 202% as well as increase the activation of superoxide dismutase gene expression by 27 times. "

Given also that TrueScience Liquid Collagen was launched in the U.S. less than one year ago, we are still at the very beginning of its success, so I project that its strong growth in the U.S. will continue in the next quarters. And the good news don't end here. LFVN just launched it in Australia, New Zealand and Japan , where it will most likely have the same success. If this is the case, I project that LFVN will also launch it in additional new markets in the next quarters, because it has presence in 18 countries, as quoted below:

LifeVantage sells its products in the United States, Mexico, Japan, Australia, Hong Kong, Canada, Thailand, the United Kingdom, the Netherlands, Germany, Taiwan, Austria, Spain, Ireland, Belgium, New Zealand, Singapore, and the Philippines. "

3) Aside from TrueScience Liquid Collagen, the company launched additional new products into new markets, as quoted from the latest annual report below:

New Product Offerings: In fiscal year 2022, we launched several new products.

We also launched several limited time seasonal flavors of Axio® during the fiscal year 2022.

Several products also were introduced into new markets in fiscal year 2022:

•Australia introduced IC Bright®, Body Wash, Body Lotion;

•Canada—IC Bright®, Daily Wellness, Refining Mask;

•Europe and Hong Kong—IC Bright®, Daily Wellness;

•Japan—IC Bright®;

•Mexico—Daily Wellness, IC Bright®, Refining Mask, and a new delivery system of Nrf2 Synergizer in 7-day blister packs for direct retailing to customers;

•New Zealand—IC Bright®, Daily Wellness, Body Lotion;

•Singapore—ProBio, IC Bright®, Daily Wellness; and

•Taiwan—ProBio. "

4) LFVN states in its latest annual report that it has one of the more financially rewarding plans in the direct selling industry, as quoted below (emphasis added):

Our Sales Compensation: We believe our sales compensation plan engineered for our independent distributors is one of the more financially rewarding plans in the direct selling industry. Our percentage of sales paid to independent distributors as compensation and incentives is one of the highest percentages reported in the direct selling industry. Our sales compensation plan also enables independent distributors to earn compensation early and often as they sell our products. Some elements of our sales compensation plan are calculated and paid daily to eligible independent distributors and others are calculated and paid weekly or monthly, allowing new independent distributors to receive their sales commissions quicker. We believe the ease of more frequent payments of sales commissions helps us attract and then retain new distributors by allowing them to receive their commission payments as soon as possible after making qualified product sales. We also offer a variety of incentives to our independent distributors for achieving specified product sales goals. We believe our sales compensation plan provides motivation for our independent distributors to sell our products to customers and share the business opportunity with those entrepreneurs’ seeking to begin their own sales business."

Based also on the recent news, LFVN made it even better. Specifically, it adopted Evolve , a new compensation plan for its independent distributors in order to further incentivize the existing ones while also retaining new ones, as quoted below (emphasis added):

On January 18, 2023, the Company announced the adoption of a new Compensation Plan for its independent consultants (formerly known as independent distributors), which became effective March 1, 2023 in its United States, Australia, New Zealand and Japan markets. These initiatives are planned to roll out to other markets where LifeVantage products are sold and distributed. As part of the change in Compensation Plan, LifeVantage independent distributors are now referred to as independent consultants."

Dividend Hike And Dividend Sustainability

Based on the guidance and recent growth initiatives mentioned above, I project that annual operating cash flow will be at least $6 million in FY 2023 and the foreseeable future.

CapEx in the first nine months of FY 2023 was $2.5 million. Given also that CapEx has not exceeded $4 million over the last years, I project that CapEx in FY 2023 and the foreseeable future will continue to be much less than $4 million. Therefore, I estimate that annual free cash flow will be at least $2.5 million in FY 2023 and the foreseeable future.

Furthermore, annual dividend payment was approximately $1.5 million, based on $0.12 per share annual dividend. And it will be almost $1.8 million , after last week's dividend hike and the new annual dividend of $0.14 per share, which translates into about 4% yield. In other words, I project that the annual free cash flow can fully cover the annual dividend payment in FY 2023 and the foreseeable future.

Last but not least, LFVN has a cash position of approximately $19.5 million (as of March 2023), so this significant cash cushion can be used for the annual dividend payment in the next years, if needed. After all, I forecast that the dividend is sustainable, barring unforeseen events.

The Repurchase Program

In Q4 FY 2022, LFVN repurchased 103,391 shares of its common stock at an average price of $4.44 per share, as illustrated below :

Insider ownership

Based on the most recent proxy statement, insiders own 6.76%, so their interests are aligned with shareholders', as illustrated below:

* Less than one percent.

Principal Shareholders

Many funds invest in the small-caps, because institutional investors commonly compare their own returns to the returns of a commonly followed index and the small-caps historically outperform the large-caps.

That said, there are institutions on the share registry who own a respectable stake in the company. Specifically, according to the most recent proxy statement, the beneficial owners of more than 5% of LFVN’s common stock are illustrated below:

Risks

First, LFVN is a micro-cap stock with low daily volume given that insiders and principal shareholders own approximately 25%, as shown in the previous paragraph. Due to the low trading volume, high volatility is likely and therefore, LFVN is not for day traders, momentum traders or short-term traders. Instead, the potential buyers need to have a 12-month investment horizon (at least).

Second, TrueScience Liquid Collagen may not continue to be successful in the U.S. in the next years.

Third, TrueScience Liquid Collagen may not be as successful in Australia, New Zealand and Japan as it has been so far in the U.S.

Fourth, the other new products mentioned above in the outlook paragraph may not have significant commercial success in the countries where they were recently launched.

Fifth, LFVN may acquire companies that will not deliver results according to the original expectations or may experience a post-acquisition integration failure.

Sixth, LFVN has presence in many countries, so it's exposed to currency risks.

Takeaway

TrueScience Liquid Collagen is one of LFVN's new products and has been very successful in the U.S. since June 2022. This is why the company also introduced it in Australia, New Zealand and Japan a few weeks ago. Additionally, the recently launched Evolve compensation program underpins the company's strategic transformation. I believe that these two factors (new products and Evolve) will help drive long term revenue growth for the company's business.

On that front, last week's dividend hike is a strong indication that the company is confident about its growth and future cash flows. In my opinion, LFVN would not increase the dividend, if it did not believe that its operating cash flow would not be positive and its free cash flow would not fully cover the annual dividend payments in the foreseeable future.

On top of this, LFVN has very low key multiples at the current price of $3.80 per share, so I forecast that its stock has strong potential for big capital gains, based on a 12-month investment horizon.

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