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Whenever I see an increase in the number of articles written for a company, I remain skeptical of pumping and dumping scenarios. So when I started to see an increase in the articles about a relatively small company that participated in the Sports Nutrition sector, I decided to take a look. It also didn't hurt that I was familiar with the company and enjoy going to the gym. Muscle Pharm (OTCQB:MSLP) is a fitness supplement that is part of the estimated $91.8 Billion Sports Nutrition sector. Since being founded in 2008, sales have risen from $1 Million in 2009 to $78 Million in 2012.

When looking at a company, there are a few questions I generally ask myself. How's the management team? Do they produce a quality product? What is a fair price for the company?

How's the management team?

Brad Pyatt is the CEO and Founder of Muscle Pharm. As a former NFL football wide receiver, he understands the sports industry, and has access to some of the top athletes and teams in the industry. He also understands what athletes look for in a brand and supplement, and more importantly, how to advertise to athletes. He has also been able to find valuable sponsors for Muscle Pharm that will reach younger populations, like the Ultimate Fighting Championship and the recent addition of Colin Kaepernick of the San Francisco 49ers.

Cory Gregory is the co-founder and current Executive Vice President. He also knows the business, and has been part of the fitness sector since collage; opening a gym and competing in weight lifting events. While he doesn't have the NFL career of Pyatt, he is still respected in the training room, and practices what he preaches.

While there are other members of the management team, these two have placed the company squarely in front of their targeted audience. Financially, the company is on solid ground. They have paid off almost all debt, and finally are turning a profit.

How does the company look?

Muscle Pharm is a well-respected company within the health and fitness sector. Their recent addition to in store placement in 24 Hour Fitness will help to boost sales, but their online success is a testament to their popularity. BodyBuilding.com, a top site for fitness enthusiasts, lists their top 50 products. Optimum has the most products on the list with 12, but Muscle Pharm is right behind them with 11, representing 22% of the top 50. On muscleandstrength.com they represent 8 of the top 50. While revenues and profitability will vary based on margins, for a company competing in the $91.8 Billion industry, grabbing 11-8 of the top 50 spots positions it well to claim a portion of the pie.

What is a fair price?

Even a great company can be overpriced, and a poor company can be too cheap to pass up. In looking for a fair price for the stock, I took into account a few things.

What is the expected growth of the company? They obviously cannot sustain an explosive growth, but they can probably ride out their success for the next couple years until growth normalizes. Over the past four quarters they went from $2.4M to $4M, stayed constant at $4M, and then doubled again to $8M. This represents a 400% increase over the year. The addition of the 24 Hour Fitness will help to keep growth, but I wanted to also look at something more sustainable. In preparing the chart, I looked at growth from 10% - 200%.

Revenue Growth Rate (yearly) 2012 2013 2014 2015 2016
10% 67,055 73,761 81,137 89,250 98,175
20% 67,055 80,466 96,559 115,871 139,045
30% 67,055 87,172 113,323 147,320 191,516
40% 67,055 93,877 131,428 183,999 257,598
50% 67,055 100,583 150,874 226,311 339,466
60% 67,055 107,288 171,661 274,657 439,452
70% 67,055 113,994 193,789 329,441 560,050
80% 67,055 120,699 217,258 391,065 703,917
90% 67,055 127,405 242,069 459,930 873,867
100% 67,055 134,110 268,220 536,440 1,072,880
120% 67,055 147,521 324,546 714,002 1,570,804
140% 67,055 160,932 386,237 926,968 2,224,724
160% 67,055 174,343 453,292 1,178,559 3,064,253
180% 67,055 187,754 525,711 1,471,991 4,121,576
200% 67,055 201,165 603,495 1,810,485 5,431,455

How will they capitalize on tax structures and margins? The charts were prepared using EBIT of 15% and 20% and a tax rate of 38% and 25%.

Revenue Growth Rate (yearly) Justified Stock Price (EBIT = 15%, tax rate = 38%) Justified Stock Price (EBIT = 20%, tax rate = 38%) Justified Stock Price (EBIT = 20%, tax rate = 25%)
10% $0.75 $0.83 $0.83
20% $1.04 $1.15 $1.15
30% $1.43 $1.57 $1.57
40% $1.92 $2.09 $2.09
50% $2.54 $2.74 $2.74
60% $3.30 $3.55 $3.55
70% $4.23 $4.53 $4.53
80% $5.36 $5.71 $5.71
90% $6.59 $5.94 $6.34
100% $6.53 $5.85 $6.85
120% $7.74 $8.18 $9.84
140% $10.71 $11.27 $13.84
160% $14.58 $15.30 $19.07
180% $19.54 $20.46 $25.77
200% $25.79 $26.96 $34.25

Based on the math, it looks like the market believes growth will be around 140% until 2016, which is possible with this stock and in this market. That represents revenues in the neighborhood of $2 Billion.

Other considerations

Muscle Pharm is still listed on the OTC market, but has been applying for admittance to one of the major exchanges. Once they are picked up by a major exchange, it will open them up to fund managers, increasing potential volume and price.

Muscle Pharm still in an aggressive growth phase, and I believe they may still see aggressive growth beyond the 200% the analysis is based on. Right now they represent less than .1% of the $91 Billion industry. As they continue to promote their product thru additional endorsements they will see revenue and market share continue to increase.

Conclusion

Muscle Pharm has gained popularity in the gym and on the trading floor. They have a solid management team that understands the industry and the customer. Customers like they product and consistently return to it, increasing market share. The market has priced the company based on potential growth of about 140% over the next four years, a very real possibility. I believe that once the company is listed on a major stock exchange, the increase in visibility and volume will drive the price even higher.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: The Market Believes Muscle Pharm Will Continue To Grow