Fitlife Brands – the multiple is not right!

My position in Fitlife Brands is still my highest conviction pick and by far the largest position in my stock portfolio. I believe that it deserves a much higher multiple. It is (1) well managed, (2) growing substantially and (3) has a rock-solid balance sheet. The uncertainty regarding their largest customer GNC has subsided.

Dayton Judd (the CEO) now has a track record of close to 3 years at Fitlife Brands. He navigated the company successfully through a restructuring, the first phase of the pandemic, a bankruptcy process of their largest customer GNC and returned the company to growth – while reducing the cost base significantly. It’s not easy to find such well managed companies on the OTC markets – and if you do chances are big that you need to pay a premium for it.

As of the latest quarter – the company has c. $4m in net cash. Given the illiquidity share repurchases can’t be achieved in size. The company is currently looking at acquisition opportunities. While it is basic language for companies to indicate that they want to grow through prudent acquisitions – in the case of Fitlife Brands – looking at all the decisions of Dayton over the last couple of years – I believe that prudent will really mean prudent. I don’t worry about dilutive financing, or sizeable acquisitions that will lever up the balance sheet dramatically.

Dayton Judd, the Company’s Chairman and CEO, commented “The third quarter was one of the strongest in the Company’s history. I am proud of our team and the results they generated in a difficult retail environment. While the fourth quarter is traditionally our slowest, we continue to see increasing demand for our products online and in GNC franchise locations. And in addition to growing organically, we continue to look for opportunities to grow through prudent, accretive acquisitions.

Excluding the bankruptcy related write-off of part of the accounts receivable position with GNC, FTLF is on track to do c. $3.00-3.50 in earnings per fully diluted share in FY20. Compared to c. $2.3 in FY19 and $0.4 in FY18. With continued expected organic growth as well as growth via acquisitions – earnings of $4 per share seems achievable for FY21.

What earnings multiple should we attach to that? I believe that 10 is too low – which would already result in a 100% increase in share price from here.

15 or even 20 seems more in line with the market – translating to a share price of $60-80. A lot of upside potential.

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