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MusclePharm Is One Strong Company...In Need of One Big Change

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There are only 2.7 million shares now, but financing would increase this to 6 million shares.

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Let's talk about MusclePharm Corp. (PINK:MSLP) for a few minutes, shall we?

This company has been making waves in the high-tech sports nutrition sector. This is a very competitive market, attracting $25 billion from consumers last year, up from $21.4 billion the previous year.

In 2011, MusclePharm's revenue flow increased 437%, and grew over 500% in 2012. The company reported $17 million in sales revenue in 2011, and crossed over into profitability in late 2012. Management realized that expenses were too high for a revenue-based valuation, so they began restructuring the company, adjusting their business model. Management compensation was reduced and supply-chain middlemen were purged where possible. The smartest move management made was moving in a direction to strip away toxic debt. The result: MusclePharm appears to be fit and trim, ready to do business in a streamlined and efficient manner.

According to analysts' articles on Seeking Alpha, 2013 should be MusclePharm's year. Citing strong revenue growth and increased margins because of Spartan-like cost-cutting measures, industry analysts forecast $0.10 per share over the next quarter and more than $1 per share for the year. Margins should increase because restructuring hooked management's net worth to share price appreciation rather than salary, and because MusclePharm's revenue, which is now near $75 million per year, is to the point where the company can command volume-based deals with suppliers.

All this means that MusclePharm should realize around 8% net profit in 2013. EPS numbers tell the true story. Assuming a P/E of 15 on 6 million shares, with a net profit of 8%, the scenario follows this road map:
  • 2013 revenue of $75 million
  • 2013 profit of $8.0 million
  • EPS should be $1.46
  • Price per share should be $21.90
The above numbers are based on the assumption that MusclePharm will announce a financing plan. Such financing would make room for a Nasdaq (INDEXNASDAQ:.IXIC) listing, and allow MusclePharm to wipe out any remaining debt. The removal of toxic debt would get rid of interest payments and simultaneously increase margins. In addition, financing would be a precursor to an SEC filing, which would give share price a kick in the pants.

However – and this is a big however – financing is crucial. There are only 2.7 million shares now. Financing would increase this to 6 million shares. This is a step MusclePharm needs to take. And since the company recently brought aboard two executive heavyweights – Gary Davis and John Bluher – it undoubtedly will move in this direction soon. Davis and Bluher know which way the wind is blowing.

If MusclePharm grows at a healthy rate for the next five years, say 20% to 40%, the company could capture 2% of the aforementioned $25 billion market. That would be $500 million, which would mean profitability of $40 million. At that point, share price would be near $80 to $100. For a company that's grown 400% to 500% over the previous two years, this is certainly feasible. MusclePharm doesn't have to continue with triple-digit growth. Strong double-digit figures would definitely make the company a player in the sports nutrition sector.

If management keeps their collective eye on the ball and sticks with their business plan, MusclePharm looks to be a surefire winner. No wonder big name, smart-money folks like Dr. Phillip Frost are investing in the company. So far Dr. Frost's track record is impeccable. He knows a winner when he sees one. And he must see one in MusclePharm.

Two years from now, PepsiCo (NYSE:PEP) or Coca-Cola (NYSE:KO), or even Monster Beverage Corp (NASDAQ:MNST) will probably being looking to buy MusclePharm.

Twitter: @RandallRadic
No positions in stocks mentioned.
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