If you look hard enough, sometimes you can find a “diamond in the rough” in the land of microcap stocks.
Today’s stock is FitLife Brands (NASDAQ:FTLF).
FitLife Brands is based in Omaha, NE and is a small nutritional supplement company that has quietly created tremendous value for shareholders over the last 8 years. The stock has returned roughly 21% annually over the last 10 years, mainly due to the capital allocation decisions of the management team. CEO Dayton Judd is a shrewd owner/operator that owns roughly 58% of the stock.
Since acquiring controlling interest in FitLife, Judd has transformed the company from a small collection of struggling supplement brands to a more robust, profitable portfolio of products.
Management’s operating playbook works like this: acquire underperforming/distressed brands at discounted multiples, then improve their profitability through cost reductions, operational improvements, and synergies with FitLife’s existing platform.
FitLife does not like to dilute shareholders when making acquisitions and uses free cash flow to aggressively pay down debt used to fund the acquisitions.
At approximately $8.19 per share, FitLife has a market capitalization of roughly $76.9 million. The company also carries approximately $37.9 million of debt, resulting in an enterprise value of around $113.7 million.
Based on current earnings, the stock does not initially appear extraordinarily cheap at roughly 8.7x EV/TTM EBIT. However, I believe the current valuation understates FitLife’s normalized earnings power, the potential improvement at its recently acquired Irwin Naturals business, and management’s demonstrated ability to allocate capital.
For paid subscribers, I walk through management’s track record of acquisitions, normalized earnings, and what FitLife could be worth to a private market acquirer.
