One of the most attractive picks for value investors looking for exposure to emerging high-growth companies with little downside is Nu Vitality Labs (NUVI), a subsidiary of Emo Capital. By the end of trading on Tuesday, the stock price was up 6.8% as awareness continues to spread. The firm has adopted a proven strategy used by a management team that has previously grown sales into the hundreds of millions of dollars within three years. Operating within the small cap universe, however, Wall Street has not yet been incentivized to uncover its true worth. This level of asymmetric information has created an opportunity for value investors to aggressively acquire shares that are trading, in my view, well below intrinsic value. Let’s review why:
Nu Vitality offers neutraceuticals and skin care products that target multi-billion dollar markets. Leveraging a direct sales strategy, the company is able to create a positive feedback mechanism that accelerates the top-line. Buyers are often independent distributors, which are incentivized to sell ever-greater volumes. Avon Products (NYSE:AVP) and Herbalife (NYSE:HLF) have used this strategy in the past – it works.
Management has recently launched three new products that focus on wellness benefits and weight loss. With a global population of 1.5B characterized as obese and an increasing amount of money being spent in this area, market penetration is substantial. In the United States alone, the market for weight loss and diet is estimated at $60B. Assuming that the company could gain just 0.04% of this market and trade at the average level of peers at 1.26x sales, these three products alone are worth at least $30.2M in just the US.
There is, of course, Europe, Australia, and Asia that the company is reaching out to. Having launched an ecommerce platform and vertically integrated its supply chain through the partnership with Pershing Processing, opportunities are not domestic, but global.
Furthermore, Nu Vitality is well diversified, targeting the cholesterol, Alzheimer’s, diabetes, arthritis, and dementia markets. Scientific studies have confirmed the health benefits of the products, which is just starting to catch on to investors.
As successful as my Sirius XM (NYSE:SIRI) case turned out, this one has even greater upside. Emerging companies are substantially depressed at the current moment given market skepticism over underlying demand. But this is soon about to change as negativity dissipates.
CASE STUDY ON SIRIUS XM, OR WHY EMERGING COMPANIES ARE THE MOST UNDERVALUED
In an earlier article here, I argued that the Sirius XM bulls were just getting started. Since then, these bulls ran right past the skeptics and pushed the stock price up by 20%, beating the NASDAQ more than 11x over. The company is now rated a “strong buy” on the Street. Based on my DCF model and analysis of the given risk/reward, Sirius more than merits this rating.
Management recently preannounced that it exceeded its 2011 guidance for net subscriber adds by roughly 100K – a 20% y-o-y growth, which was double that of auto sales. This favorable result was largely a function of stronger-than-expected sales in US light vehicles during the fourth quarter. December SAAR grew by nearly 10% y-o-y while the company continued to hold a stellar conversion rate of around 50%. Going forward, analysts are predicting yet greater growth.
The company maintains an attractive revenue stream from both subscriptions and advertising. The combination of price increases and unlocking revenue synergies will, in my view, cause margins to expand far beyond what the market acknowledges. And as Sirius approaches 3x leverage, shareholders will see more of the free cash flow returned to them in the form of an aggressive share repurchase program in late 1Q12. Like Nu Vitality, the company has an incredible network of distribution vehicles: Ford (NYSE:F), General Motors (NYSE:GM), and Toyota (NYSE:TM). Furthermore, the company has tremendous applicability in Android and the iPhone.
Value investors have it all wrong when they lament that the company is trading at a respective 71.3x and 30.6x past and forward earnings. Companies with emerging growth stories merit these multiples given the international expansion, revenue, and cost catalysts that will drive positive market reinforcement. Sirius is expected to grow free cash flow by a CAGR of 62.7% over the next three years to $907M in 2013, as WACC concurrently declines. Discounting backwards by a WACC of 9% and assuming a perpetual growth rate of 1.5% while factoring in net debt, the company is worth $8.7B. Then there is the substantial implied value of NOLs that need to be additionally accounted for. Consensus estimates for EPS are that it will grow by 500% to $0.06 in 2011 and then by 16.7% and 42.9% more in the following two years.
While a macro recovery will drive consumer expenditures and lift value, a double dip raises the possibility of a takeover for both firms. Accordingly, Sirius and Nu Vitality merit bullish sentiment and deserve to be rated a “strong buy” – hopefully, you can be that early investor.