MusclePharm Muscling In On The Big Boys

Submitted by Randall Radic as part of our contributors program.

Let’s talk about MusclePharm (MSLPD.OB) for a few minutes. This company has been making waves in the high-tech sports nutrition sector, which is a very competitive market, attracting $25 billion from consumers last year, up from $21.4 billion the previous year.

In 2011, MusclePharm’s revenue flow increased 437%, and grew over 500% in 2012. The company reported $17 million in sales revenue in 2011, and crossed over into profitability in late 2012. Management realized that expenses were too high for a revenue-based valuation, so they began restructuring the company, adjusting their business model. Management compensation was reduced and supply-chain middlemen were purged where possible. The smartest move management made was moving in a direction to strip away toxic debt. The result: MusclePharm appears to be fit and trim, ready to do business in a streamlined and efficient manner.

According to analysts’ articles on Seeking Alpha, 2013 should be MusclePharm’s year. Citing strong revenue growth and increased margins because of Spartan-like cost-cutting measures, industry analysts forecast $0.10 per share over the next quarter and more than $1 per share for the year. Margins should increase because restructuring hooked management’s net worth to share price appreciation rather than salary, and because MusclePharm’s revenue, which is now near $75 million per year, is to the point where the company can command volume-based deals with suppliers.

All this means that MusclePharm should realize around 8% net profit in 2013. EPS numbers tell the true story. Assuming a P/E of 15 on 6 million shares, with a net profit of 8% the scenario follows this road map:

2013 revenue of $75 million

2013 profit of $8.0 million

EPS should be $1.46

Price per share should be $21.90

The above numbers are based on the assumption that MusclePharm will announce a financing plan. Such financing would make room for a NASDAQ listing, and allow MusclePharm to wipe out any remaining debt. The removal of toxic debt would get rid of interest payments and simultaneously increase margins. In addition, financing would be a precursor to an SEC filing, which would give share price a kick in the pants.

However – and this is a big however – financing is crucial. There are only 2.7 million shares now. Financing would increase this to 6 million shares. This is a step MusclePharm needs to take and, since the company recently brought aboard two executive heavyweights – Gary Davis and John Bluher – it undoubtedly will move in this direction soon. Davis and Bluher know which way the wind is blowing.

If MusclePharm grows at a healthy rate for the next five years, say 20% to 40%, the company could capture 2% of the aforementioned $25 billion market. That would be $500 million, which would mean profitability of $40 million. At that point, share price would be near $80 to $100. For a company that’s grown 400% to 500% over the previous two years, this is certainly feasible. MusclePharm doesn’t have to continue with triple-digit growth. Strong double-digit figures would definitely make the company a player in the sports nutrition sector.

If management keeps their collective eye on the ball and sticks with their business plan, MusclePharm looks to be a sure-fire winner. No wonder big name, smart-money guys like Dr. Phillip Frost are investing in the company. So far Dr. Frost’s track record is impeccable. He knows a winner when he sees one. And he must see one in MusclePharm.

Two years from now, Pepsi or Coke or even Monster Beverage Corporation will probably begin looking to buy MusclePharm.