2023-04-27 16:44:38 ET
Summary
- LifeMD's 18% year-to-date fall has extended the 2022 stock weakness to push the telehealth company to the lowest multiple amongst its peers.
- This was against fiscal 2022 fourth-quarter revenue that notched the company's first sequential revenue decline since the pandemic.
- An upward reversion to its median peer comp sales multiple is likely on the back of sustained profitability.
- The company's Series A preferreds offer a unique way to play this potential recovery, albeit with a material level of risks.
LifeMD (LFMD) has not had a great year so far. Its stock price is down 18% year-to-date, briefly flirting with moving below Nasdaq's minimum listing requirement as investor angst around rising Fed funds rates aggregated with a quarter of revenue softness for the direct-to-patient telehealth company. Fiscal 2022 fourth-quarter revenue of $28.1 million , a decline from $31.4 million in the third quarter was LifeMD's first quarter of sequential revenue decline in a while. This broke with what had been hyper-growth since the pandemic boosted demand for its constituent services. Indeed, the company was last year ranked number 140 on Deloitte's Technology Fast 500, a ranking of North America's 500 fastest-growing tech, media, telecoms, life sciences, and energy tech companies.
Critically, its price-to-sales multiple has dropped to the lowest amongst its peers to perhaps present the core avenue for returns. The company owns a portfolio of brands; RexMD, ShapiroMD, NavaMD, and Cleared, to offer virtual primary care, diagnostics, and specialized treatment for men's and women's health. The company also offers treatments for allergies, asthma, hair loss, and dermatological conditions. The bull case is built on the increasing adoption of digitally native solutions to health and wellness and the company's push toward profitability.
The Discount And Push To Positive Cash Flows
LifeMD trades at a roughly 90% discount to its peer group median, a discount that has persisted for the last year. For risk-takers, the current price level has to a large extent deemphasized much of the company's current sales. The risks are pertinent but it seems the near to medium-term outlook is slightly skewed to the upside if this negative sentiment improves.
Unprofitability forms the core headwind against LifeMD with negative shareholders' equity of $7.3 million also raising the specter of risk. However, gross margin of 86% was up 600 basis points from 80% in the year-ago comp. Net income came in at negative $11.9 million, an improvement from negative $18.1 million in the year-ago quarter with cash burn from operations coming in at $2 million. This was also a material improvement from a cash burn of $5.8 million in the year-ago comp. Crucially, the company achieved positive consolidated adjusted EBITDA of $631,000 during the fourth quarter, a first.
LifeMD is now guiding for fiscal 2023 consolidated adjusted EBITDA to come in between $12 million to $18 million on the back of revenue of $140 million to $150 million. I like that revenue is set to grow by at least 17.6% over fiscal 2022 revenue of $119 million in 2022. The company has also raised a $40 million credit facility maturing on October 1, 2026.
The Series A Preferreds With The 15.6% Yield
LifeMD 8.875% Series A Cumulative Perpetual Preferred Stock (LFMDP) was issued back on September 28, 2021, and offers a $2.21875 annual coupon for a 15.6% yield on cost. This fat yield is wrapped in risk beyond what preferred shareholders are normally exposed to. Yet if LifeMD's adjusted EBITDA push works out to be sticky then I'd expect the yield to make it to single digits on the back of a capital uplift.
They're currently trading materially below par at $14.24 per share, a $10.76 difference for a 43% discount. I don't think the preferreds should be trading at par against the current operational footprint of LifeMD, but yet the current discount could seem outsized in retrospect if future quarters see positive operating cash flows realized on the back of higher EBITDA to cover the $800,000 cost to LifeMD of paying out the coupons every quarter. Against this risk, there is still a lot to like.
The preferreds are perpetual, hence, will in the interim form a forever income source as long as the company does not redeem them. However, why would LifeMD redeem at par with these currently trading for 57 cents on the dollar? A much more prudent strategy would be for the company to buy back the preferreds opportunistically on the open market with future cash flows from operations. Current holders should not only benefit from the $2.21875 annual coupon distributed in quarterly installments, but they also stand to ride potential upside from a future program by LifeMD to save costs by buying back shares on the open market. However, it's important to note that daily liquidity with this security is poor. Daily volume has moved as low as 365 shares, around $5,200 on some days.
Whilst they're cumulative so any unpaid dividends should accrue as a liability on LifeMD's balance sheet, the core risk is whether the market's distressed pricing of the commons is meant to foreshadow material financial difficulty in the near future. In this case, the preferreds which rank above the commons on the capital structure will see the coupon suspended and will collapse. However, I might take a small speculative position in them on the back of fiscal 2023 first-quarter earnings.
For further details see:
LifeMD: Bottom Fishing With Its Unrated High Yield Preferreds