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LFVN - Recent Sell-Off Is An Incredible Buying Opportunity

|Includes: LifeVantage Corporation (LFVN)

LifeVantage (NASDAQ:LFVN) is a well managed profitable company with specific growth opportunities. Over the past few weeks, there has been a dip in their stock price, despite no negative news, that creates a good buying opportunity for investors looking for a long-term play.

INVESTMENT THESIS

· Major Capital Investments Completed

· The science behind their products is proven. Leading Product validated by 6 patents and multiple studies from leading universities

· Improving cash flow, healthy balance sheet,

· Management has aggressively bought back $50 Million of stock over the past year and is expected to continue buying back stock.

  • Recent dip in stock creates a good buying opportunity

Major Investments are Completed

After experiencing extremely robust growth for the past 3 years, LifeVantage reached a point where they needed to make substantial investments into their business in order to support their larger scale. To give a little perspective, in fiscal year 2009, the Company generated $4 million in revenue. In fiscal year 2012, they generated $126 million, and then in fiscal year 2013, they achieved $208 million. This rapid growth requires significant investment. Their investments over the past year included expanded distributor programs and tools, such as LifeVantage University, which allows distributors to improve their businesses, as well as upgraded marketing materials. I will address their customer base later, but distributor growth is an important component of LifeVantage's growth strategy, and these tools will enable distributor growth to accelerate in the future. They also invested significantly in their international growth efforts. Japan is LifeVantage's second largest market after the United States. Given their initial success in Asia, management made the prudent decision to expand their office in Tokyo to help drive business in the Asia Pacific region and provide their distributors with the same level of support that US based distributors receive. They also are holding additional elite academies for distributors in Asia Pacific. LifeVantage launched in Hong Kong approximately one year ago, and they also recently announced they are beginning to sell products in the Philippines.

LifeVantage recognized the need to upgrade their distributor back-office systems that will allow them to expand their business with more distributors, new distributor integration and roll-out new programs, and promotions in more countries. They also implemented a more robust supply chain and manufacturing planning system, including enhancing quality control processes. They also stated that they upgraded to a global accounting and ERP system, which we have seen lead to meaningful long-term operational efficiency improvements with a number of companies across a variety of industries. They augmented their global internal audit controls for financial, operational, and technology processes and created domestic and international corporate tax strategies. Enhanced its treasury function in order to limit foreign-exchange risk and improve banking relationships in seven countries and counting. They now have a marketing and sales infrastructure that includes new media strategies and engaged a third-party to conduct an audit that in turn enriched their risk management systems.

The Company recently entered into its first major branding sponsorship related to one of the fastest-growing sports in the United States. They have a long-term jersey front partnership with Real Salt Lake of Major League Soccer. The LifeVantage logo will be on the front of the Real Salt Lake jersey beginning next major league soccer season. Major league soccer continues to grow in popularity and now the LifeVantage brand will benefit from high impact exposure in stadiums, on television, in advertising, soccer video games, and through player appearances across United States as well as around the world.

Clearly, LifeVantage is committed to capitalizing on their long-term opportunity. While these investments caused compression of their margins and pressured their earnings over the past few quarters, these were investments that needed to be made in order for them to achieve sustainable growth in coming years. Looking ahead, the Company is now in a position to improve their operating margins. Once margins increase and stabilize, I believe the stock should enjoy positive momentum.

Scientifically Backed Products

At the core of any business is their product. LifeVantage's flagship product is Protandim®, which activates the body's natural ability to reduce age-related symptoms on the cellular level. Protandim reduces oxidative stress in humans by an average of 40 percent in 30 days. It activates Nrf2 to communicate with your DNA to deliver a biochemical wake-up call to your genes. In the marketplace, there has been some false information floating around regarding the validity of the scientific backing of LifeVantage products. This is simply untrue. Protandim has six patents, and several leading research universities have published independent studies in support of the product and its efficacy. The first study was published in 2006 by the University of Colorado, and the most recent study was published in 2013 by the Colorado State University. Additional universities that have conducted studies include Louisiana State University, Virginia Commonwealth University, and Ohio State University. For your reference, you can learn more about these studies on pubmed.gov.

In addition to the dietary supplement, LifeVantage also sells TrueScience®, an anti-aging skin cream, and Lifevantage® Canine Health, which is their newest product that is formulated to reduce oxidative stress and support joint function, mobility, flexibility, and cognitive function in canines.

The Company has consistently reiterated their commitment to developing additional scientifically backed products that leverage their deep existing research. We look forward to hearing what they announce next.

Customer Base

An aspect of LifeVantage's business model that I find attractive is their strong customer base. At the end of their most recently reported quarter ended September 30, 2013, they had 67,000 active independent distributors, which they define as someone who has purchased product in the past three months for retail or personal consumption. This is a 24% year over year increase and compares to 54,000 active independent distributors as of September 30, 2012. Management has stated that expanding their distributor base both in the United States and internationally is a key area of focus in 2014.

But, putting their distributor growth aside for a moment, what is unique about LifeVantage is that approximately 80% of their customers are what they refer to as Preferred Customers, which they define as an individual that has purchased product in the past three months for personal consumption only. These customers represent a predictable and steady revenue stream for LifeVantage, and this supports their "consumption" model, an issue that has been raised often over the past year among the high profile debates about some of the other multi level marketing companies. While future growth will likely be primarily driven by distributor growth, LifeVantage's strong Preferred Customer base is a very healthy baseline of customers and supports their products efficacy and customer satisfaction.

Financial Health

Lastly, I think it is important to take note of LifeVantage's financial health. Their balance sheet is strong, with cash and cash equivalents of $28 million as of September 30, 2013, an increase compared to $26 million at the end of fiscal year June 30, 2013. Despite making significant investments into their business, the Company is improving its cash flow. In the first quarter of fiscal 2014 (quarter ended September 30, 2013); they generated $4.9 million of cash flow from operations compared to $0.9 million in the first fiscal quarter of 2013.

Autoship revenue, or recurring revenue, for the current quarter was 59% of overall revenue. Autoship revenue is derived from recurring monthly orders that are automatically deducted from credit cards every month. This is an increase when compared to the prior year quarter of 45% and I believe is a good sign to its strong business model.

Operating margins are also moving in the right direction. On a sequential basis, its operating margins in the first quarter of fiscal 2014 improved from both the third and fourth fiscal quarters of fiscal 2013.

I am also pleased that over the past year, LifeVantage has bought back $50 million in stock and they have stated that they will continue to buy back more stock. This underscores management's confidence in their future and commitment to enhancing shareholder value.

Part of the recent buybacks was the completion of its modified Dutch auction on October 31. The Company repurchased approximately 16.3 million shares of its common stock at a purchase price of $2.45 per share for an aggregate cost of $40 million. The shares repurchased represented approximately 14% of the company's total shares outstanding as of September 13, 2013.

The $40 million modified Dutch auction was financed through a financing agreement on October 18 provided by TCW Special Situations LLC. The financing agreement provides for a senior secured credit facility in an aggregate principal amount of $67 million, of which $47 million was funded and $20 million is available post-close under certain terms and conditions for general corporate purposes. The term loan is a five-year loan maturing on October 18, 2018, and the principal amount is repayable in consecutive quarterly installments beginning with the calendar quarter ending March 31.

LifeVantage has only scratched the surface of its full potential. They have leading products, a strong brand, and a greatly improved management team. I view the dip in the stock as a great opportunity for a value, long-term investor to initiate a position or build upon an existing position.