MusclePharm (OTCQB:MSLP) is a dietary supplement and sports nutrition company headquartered in Denver, Colorado. Since their inception in 2006, they have resolved to meet one principal objective; become the undisputed leader of the sports nutrition sector.
This is a decidedly ambitious goal. The sports nutrition sector is not only highly competitive, but it is also part of the 23 billion dollar supplemental and proactive nutrition market (i.e. vitamins, minerals, and supplements). This sector as a whole is growing at an extraordinary rate, and the sports nutrition market, specifically, is experiencing transformational growth in its own right. MusclePharm has been a significant catalyst for, and beneficiary of, said growth.
In 2009 MusclePharm was awarded the New Brand of the Year award by bodybuilding.com. In 2010, the company won a multitude of awards from the same entity. These awards included, but were not limited to, Breakout Brand of the Year and Best New Supplement of the Year. In 2011 and 2012, the trend continued for MusclePharm. During those two years the company was nominated for 32 awards, and won six of them. Of those six, the awards included Best New Supplement of the Year (again) and Brand of the Year.
Needless to say, MusclePharm came onto the scene quickly, and has shown no signs of slowing its emergence or expansion anytime soon.
A Brief Historical Overview
MusclePharm has been both explosive and contentious in its first seven years. While it has been an award winning company in its sector since it first appeared, it has also endured some problematic times. Alleged issues pertaining to intellectual property infringement and accounting inconsistencies have been part of the MusclePharm story since 2010. Most recently, the company has been the subject of an SEC investigation concerning accounting misappropriations and inadequate internal controls. However, while not yet satisfied, the initial insights into these matters appear to be favoring MusclePharm.
Despite these well publicized issues, the company has continued its pursuit of additional market share procurement. In the last year the company has entered into agreements with consumer warehouse giant Costco (NASDAQ:COST), as well as with bodybuilding icon Arnold Schwarzenegger. They have committed time, money, and resources to creating and marketing products specifically for women. They have proven to be diverse, aggressive, calculated, and effective. Their sales have continuously increased, and the company is alarmingly close to seeing revenue finally translate to measurable and consistent profits. MusclePharm is nothing if not ambitious.
An Ongoing Pursuit of Excellence
Assuredly undeterred by the ongoing SEC investigation, and with no signs of complacency or contentment on the horizon, MusclePharm has continued its pursuit of further competitive edges in the marketplace. Most recently, the company entered into an Asset Purchase Agreement with BioZone Pharmaceuticals (BZNE) in order to procure such an advantage. The agreement provides that MusclePharm will "acquire substantially all of the operating assets of BioZone including the QuSomes, HyperSorb and EquaSomes drug delivery technologies." In exchange, BioZone will receive 1.2 million shares of MusclePharm's common stock. While shareholders at BioZone may be less than enthused by this recent development, if this agreement is indeed brought to fruition, shareholders at MusclePharm should be celebratory.
The technology detailed in the agreement to be procured by MusclePharm is substantial. All of the drug delivery technologies identified are derived from developments into a liposome based delivery system capable of improving product efficiency. These innovations have led to a second generation liposome which has proven to be safer, more versatile, and less expensive to manufacture than existing solvents on the market. Simply put, these acquisitions could make MusclePharm's already highly regarded products even more sought after by consumers.
Furthermore, despite often being referred to as "The Athlete's Company" by CEO Brad Pyatt, this new technology could enable MusclePharm to further expand its targeted markets. The sports nutrition sector is no longer only competing for the attention of alpha-males and professional athletes. The client base is expanding to include health-conscious working moms, time restricted executives, aspiring young athletes, and an aging population diligently striving to maintain strength and health. As a result, the once conventional standards for quality are being redefined. Protein bars with the consistency of chalk are no longer satisfactory. Scientifically formulated meal replacement drinks, that taste like raw yeast and maintain the texture of wet sand, are now unacceptable. As consumers evolve, so do their expectations.
In America though, what we are notoriously in pursuit of is faster and more efficient results. As a social organism, the American people are most focused on meeting an objective in the most expedited time frame possible. That is where the real battle for sports nutrition supremacy is fought. The company that provides the highest quality products, with the most effective outcomes, over the shortest duration of time, will almost certainly win the war. The liposome based technologies MusclePharm is set to obtain from BioZone could have a significant impact on the safety profiles, effectiveness, and efficiency of their future products. These improvements would undoubtedly appeal not only to MusclePharm's existing clientele, but also to the less traditional sports nutrition consumer.
Market Growth and Diversification
The supplemental and proactive nutrition market is not only one of considerable size, but also one with substantial growth potential. In the current market most significantly targeted by MusclePharm, that of the competitive athlete, the compound annual growth rate has developed at an average of 22.5% per annum since 2010. This fact alone would bode well for companies competing in the sector. However, the growth rate of sports nutrition consumer spending outside of that niche has grown at an even more exponential rate. According to BCC Research, the global market for sports nutrition as a whole was 31.2 billion in 2008, and could well see growth in excess of 230% by year's end 2013. Of all the sectors and subgroups comprising of the global market for sports nutrition, the sports supplement market is predicted to see the most significant rate of growth. Sports supplementation is set to outpace vitamins, weight management, and supplemental energy products by a factor of two to one by 2017.
If the "bulls-eye" of the sports nutrition market is the competitive athlete, then the everyday consumer should be considered the "outer ring". This outer ring is comprised of athletic hobbyists, health conscious adults "on-the-go", and proponents of an active lifestyle. In the outer ring, the priorities among the consumer group tend to lean towards product safety, product efficacy, and product cost. All of these attributes could be enhanced and improved with the technology MusclePharm is gaining through their deal with BioZone. If so, the addition of this technology could further foster MusclePharm's ability to diversify their segmented targets in the consumer marketplace with a higher rate of success.
Assuming that the supplemental and proactive nutrition market continues to grow at current rates, then in 2014/15 the total domestic market could approach 30 billion dollars. If MusclePharm were to capture even one percent of that market, equal to 300 million, and continue to see sales increase at the same rate they did in the third quarter of 2013 (51% growth to 31.1 million), they could be poised to see a price per share upwards of 24-32 dollars pending total outstanding shares at such a time. Even in the event of substantial dilution moving forward (current outstanding share estimates are at about 8.8 million) a price target of 18-21 dollars by 2015 would be more than reasonable.
What to Expect
The MusclePharm success story is a prototypically American one. It tells of an emergence from obscurity, riddled with criticism and controversy, and the eventual, and perhaps inevitable, humbling for the greater good. In many ways, the company is reminiscent of the emergence of Under Armor (NYSE:UA). Both companies were started by former athletes in their twenties whose business acumen was regularly under examination. Both companies were born from a sports background and designed to make an impact in sports related markets. Both companies utilized their knowledge, experience, and contacts in the sporting world to help their companies emerge onto the public scene with considerable endorsement. The biggest difference between the two companies however, would likely be the discipline displayed by their individual founders. Brad Pyatt, the founder and CEO of MusclePharm, has been criticized for focusing more on his own visibility, net worth, and personal brand, than on shareholder interest and value. Furthermore, criticism of his business operations and fiscal judgment, has also been widespread. This has proven to be a concern for some potential investors.
However, this issue should, in due time, subside. The company has retained the advisory services of renowned investor and entrepreneur Phillip Frost. It is reasonable to assume that Dr. Frost would not have accepted his role within the organization without having first been assured of executive intention and conduct. Furthermore, if Brad Pyatt was in fact some disgruntled former athlete hell bound on proving his worth in the world, he would not have taken on a relationship with a man who is so clearly his business superior. Dr. Frost has been part of MusclePharm for a while now, and there has yet to be any issues.
If there are any legitimate concerns pertaining to MusclePharm, they would be of the more traditional standard. The company has yet to turn revenues into profits, and has seen their proposed listing onto the NASDAQ continuously delayed. These types of issues rarely are embraced by potential investors. However, given the fact that the SEC investigation has yet to be resolved, the delays in transitioning from the OTC Markets to the NADSAQ are not completely unfounded. There is no conspiracy theory here. It is likely just a matter of getting ones house in order before moving on to another residence.
MusclePharm prides itself on being "The Athlete's Company". However, that is likely a result of Brad Pyatt's membership in the professional athlete fraternity, more so than a business model. Given the company's commitment to developing women's products, as well as their recent agreements with retail wholesalers, it stands to reason that future ventures into less restrictive consumer markets are inevitable. The agreement with BioZone however is perhaps the most interesting of recent developments. As stated previously, the consumer market is, especially in America, fixated on advancement, improvement, and efficiency. American's want what they want, and they want it immediately. Results in the gym, or on the track, are no different. Considering the marketable strength MusclePharm possesses as a brand, in correlation with the advanced liposome technology procured from BioZone, and the relentless ambition MusclePharm has displayed since its beginnings, the company is positioning itself to be more than capable of meeting America's ever evolving consumer standards.
In addition, while it would be irresponsible to speculate with any overzealous confidence, it appears as though the SEC investigation is not turning up anything of any dire consequence to MusclePharm as a publicly traded company. This bodes well not only for shareholder value and corporate integrity, but also for the future procurement of a more respectable listing. Needless to say, each of those developments would support the company's future growth and success.
In terms of forecasting a conservative metrics based target for MusclePharm's price per share moving forward, one must consider the two most historically relevant drivers of equity performance; growth and earnings. For the three month period ending September 30, 2013, the gross sales at MusclePharm were $31, 080, 225. Comparatively, to the same fiscal period ending prior year the gross sales equated to $20,627, 691. For the nine month period ending September 30, 2013, the gross sales were $84, 519, 744. Consequently, for the same fiscal period ending prior year the gross sales were reported to have been $58, 799, 563. These revenue increases, compared by relative fiscal period, show growth of 33% and 31% respectively. Assuming each period by a factor of three, and then nine, in order to be likened month to month over a rolling average period, the average rate of growth for the period as an entirety represents gross sales growth of 31.5%. During this same period, utilizing the same method of determining rolling averages, the rate of growth for total operating expenses was 16.25% greater, measuring at 44.75%.
At first glance, this appears askew and unattractive. A rolling nine month average, measured year to year, shows a proportional gap between revenue and expenses of -16.25%. However, if one were to examine the same criteria from 2011 - 2012, utilizing the same method, the margin between revenues and expenses would report at 20.25%. Therefore, revenues are continuing to increase, and the gap between sales and costs is decreasing. The margins, en route to profitability, are getting smaller. This pattern serves well both MusclePharm and shareholder interests. If revenues continue to grow at a two year rolling average measured as seen above, and if executed reduction of margins continue on their historic course, then the associated reflection in share price (based on MusclePharm's two year correlated measurement) should increase from current levels (8.80 pps as this is written) 38.95% in one years' time. From that price point in 2014, an additional increase of 39.95% should also be applicable. Those numbers are deduced from current growth consolidated (31.5%), as well as applicable reductions in margin (4%), and a conservative continued closing of the gap of 1.85%, plus revenue growth increases of 2%, annually. This should carry the company into profitability by the beginning of 2016, at which time PPS growth would likely continue, but at a slower rate.
MusclePharm is a young, award winning, ever expanding company, competing in an extremely profitable market. Their guardian angel, Dr. Phillip Frost, is a businessman and industrialist of the highest order. Their CEO, Brad Pyatt, is becoming more capable with every obstacle successfully overcome. Their ambitions, technology, and products are constantly evolving and being met with considerable acclaim. Assuming the ongoing SEC investigation is resolved without major incident, this company is assured of a transformational period upcoming. A price target for 2014 of $12.23, and a price target for 2015 of $17.12, should be all but inevitable. Prospective investors would be wise to consider adding MusclePharm to their portfolios.
Additional disclosure: Various outlets report MusclePharm's outstanding shares differently. The assumption in this article, of 8.8 million shares outstanding, was the most common number reported. Both Google and Bloomberg reported approximately 8.8 million.