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I am fascinated by slight differences that distinguish listed companies from their bulletin board counterparts. With my interest sparked from other Seeking Alpha articles, I have been examining two companies operating in the packaged food sector: Lifeway Foods (NASDAQ:LWAY) and Muscle Pharm (MSLPD.OB). To my surprise, the two companies are remarkably similar from a fundamental perspective. In fact, I propose that there is only one characteristic of Muscle Pharm that meaningfully distinguishes it from LifeWay Foods: credit-worthiness. In this article, I hope to explain how credit-worthiness separates two uncannily similar companies by a gulf of $120 million in market capitalization.

I conclude with some final thoughts on Muscle Pharm's improving credit-worthiness due to its enormous sales volume growth. This improvement could unlock a significant amount of shareholder value by allowing it to renegotiate with its creditors, which is why I am taking the time to pen this article. (I should not have to mention, of course, that any resemblance to Lifeway Foods' market capitalization would mean multi-bagger returns for Muscle Pharm shareholders.)

Lifeway Foods Versus Muscle Pharm

A bit of background is necessary before I can explain why credit-worthiness has allowed Lifeway Foods to command a market capitalization nine times that of Muscle Pharm. Lifeway Foods sells kefir in the dairy aisle of grocery stores; Muscle Pharm sells sports supplements on the shelves of nutrition stores like GNC. The two companies are vastly different in terms of age, manufacturing strategies, number of employees, and target markets, but neither is superior than the other in these categories.

There is no reason for an in-depth comparison of products, as the differences between kefir and sports supplements are obvious. Only one highlight is meaningful: shelf life. Lifeway Foods' products have a much shorter and costly shelf life than Muscle Pharm's products. Kefir must be refrigerated in brick and mortar stores, whereas Muscle Pharm's products require no refrigeration. Because of this, Muscle Pharm's products are easily distributed online. Indeed, 41% of Muscle Pharm's sales last year came from just one website: BodyBuilding.com. The scale and growth potential of the internet has contributed to Muscle Pharm's triple-digit revenue growth rate. (More comparisons are listed below.) Because online growth is not an option for Lifeway Foods, Muscle Pharm's revenues are expected to outpace Lifeway Foods' revenues in 2013.

Lifeway FoodsMuscle Pharm
Market Capitalization$133M$13M
Advertising Expenses$2.7M$6.6M
Gross Margins38.8%20.4%
In-House ManufacturingYesNo
G&A Expenses$6.3M$16.4M
Revenue Growth14.5%364%

All figures calculated on a year-over-year and year-to-date basis.

Note the kicker: Lifeway Foods increased revenues by 14.5% this year. Muscle Pharm? 364%. Revenue growth rate at Lifeway Foods is not even in the same ballpark as Muscle Pharm. Lifeway Foods has been around for 26 years and is growing revenue at a slow, steady pace; Muscle Pharm is on a proverbial rocket ship.

Lifeway FoodsMuscle Pharm
20042009
revenues$16.3M$1M
cost of goods sold55%90%
20052010
revenues$20.1M$4.1M
cost of goods sold59%68%
20062011
revenues$27.7M$20.8M
cost of goods sold62%70%
2007 (first nine months)2012 (first nine months)
revenues$28.6M$50.6M
cost of goods sold65%79%

The trend is obvious. Muscle Pharm has passed Lifeway Foods in revenue growth, and now its only task is to maintain its pace while lowering its cost of goods sold. Improving sales volume and corresponding credit-worthiness should allow Muscle Pharm to do this.

A Bad Credit Score Has Plagued Muscle Pharm

Lifeway Foods ($135M) is worth nine times more than Muscle Pharm ($15M) mostly because of its superior credit score and corresponding implications. Muscle Pharm has never been able to secure business credit on traditional terms because of its young age and quick sales growth. Shortly after its $10 million IPO, for example, it raised another $10 million in cash just for brand marketing. On top of that, Muscle Pharm paid millions more in salaries, administration, rent, athletic endorsements and product development, all of which required up-front capital. Even worse, Muscle Pharm's distribution contracts were often sudden and enormous, requiring last-minute loans for manufacturing and shipping. All of this bootstrapping required quick cash, and unfortunately, much of it came in the form of high interest loans, stock offerings and convertible debt notes.

From a fundamental perspective, Lifeway Foods is a more stable company, yet its revenue growth rate is incomparably slow versus Muscle Pharm's triple-digit rate. Lifeway Foods' price-to-sales (TTM) ratio is 1.75; Muscle Pharm's is 0.22; the average S&P 500 company is 1.3. Although Lifeway Foods' ratio is conservative, this is justified because its growth rate is slow. In contrast, readers will notice that if Muscle Pharm's ratio were to rally from 0.22 to 1.75, shareholders would almost score a ten-bagger. (Of course, Muscle Pharm will not rally until the company increases margins and decreases debt so that shareholders can benefit from revenues.) In terms of debt versus equity levels, Lifeway Foods' current ratio (MRQ) is 2.63; Muscle Pharm's is 0.39; the average S&P 500 company is 1.5. Muscle Pharm's weakness here is obvious due to its higher debt load.

My Opinion

Frankly, Muscle Pharm was poorly managed from a financial standpoint during its early years. The company's creditors demanded equity, preferential treatment, and astronomical interest payments. Muscle Pharm achieved impressive revenue numbers, but it suffocated under the weight of the debt that was financing its operations. Executives also paid themselves six-figure salaries that must be slashed if they plan to restore shareholder confidence.

In contrast, Lifeway Foods is a debt-free, profit-generating machine. It has not always been this way, of course- it struggled in its early years just like any company. Nowadays, however, it enjoys its decades of hard work that distinguish it from younger companies like Muscle Pharm. Lifeway Foods' credit score is strong, and it has sufficient cash to cover short-term obligations, so it loses negligible amounts of money to debt payments. Lifeway Foods also has plenty of cash for day-to-day operations, unlike Muscle Pharm. Overall, credit-worthiness (and associated benefits) allows Lifeway Foods to generate higher profit margins with far lower expenses, giving it a market capitalization $120 million higher than Muscle Pharm, despite generating equivalent revenues.

Things are changing, however. In a dramatic restructuring over the past six months, Muscle Pharm managed to clean up most of its toxic debt overhang. It called in substantially all warrants. It slashed 99% of its derivative financing liabilities from $7.1 million at the end of 2011 to just $300 as of December 5, 2012. It raised its stock price through a 1-for-850 reverse stock split. It secured a zero-interest bridge loan for $1 million. Its CEO said the company will seek an up-listing to a major exchange. Shares have been consistently trading above $4 per share and will soon meet NASDAQ's 45-day minimum bid requirement.

What It All Means

We know that Lifeway Foods is two decades older than Muscle Pharm with a stable, growing, profitable and debt-free business model. In contrast, Muscle Pharm has a debt-laden yet explosive business model with tons of revenue. We also know that by 2013, Muscle Pharm's revenues will outpace Lifeway Foods' revenues, primarily due to online sales growth. Muscle Pharm's margins will also rise as its credit-worthiness improves. Higher sales volume, as well as margin-increasing initiatives like in-house manufacturing and direct distribution, will allow Muscle Pharm to seek more traditional business credit.

So, we are left with two companies: one worth $135 million and one worth $15 million. One is debt-free, the other is underwater but threatening to escape in 2013. Both generate the same amount in revenues, and while one is profitable, the other is growing so fast that it barely matters.

Poor credit-worthiness has punished Muscle Pharm since its founding in 2008, but it looks like management has finally had enough. Debt levels have been slashed and revenues will exceed $100 million annually, so its credit score is rising rapidly. This gives management fresh bargaining power for renegotiating with creditors next year. If Muscle Pharm could shave off 7% in costs (7% of $100M in expected 2013 revenues = $7M), Muscle Pharm could add half its entire $15 million market capitalization to its bottom line in 2013.

It is crystal clear to me that Muscle Pharm knows how to sell its product and aggressively build a brand. Its revenue growth is spectacular. Its debt does not scare me because the growth is so strong. (Frankly, I hope the company lowers interest payments and take on more debt. What shareholder wouldn't want their company to take a loan for 15% to earn a triple-digit return?) Personally, I am on the sidelines only until management announces executive salary reductions and financing plans for 2013. I expect a decision on financing before January 18 per its latest SEC filing. If they take the upcoming year seriously and prove to shareholders that their interests are aligned with their equity stakes and not just cash compensation, 2013 could be a tremendous year for this young company. As always, caveat emptor.

Source: Side-By-Side Comparison Of Lifeway Foods And Muscle Pharm