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Water Tower Research

Research from Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Equity Research Firm

Equity Bottom-Up

<ul><li>3QFY24 EPS was $0.21 versus a depressed $0.08 in 3QFY23 and above our $0.16 estimate.</li><li>3QFY24 EBITDA of $5.1 million beat our $4.6 million estimate and was up sharply from $3.3 million a year ago.</li><li>EBITDA margin of 10.5% exceeded our 8.7% estimate, driven primarily by lower commissions and incentives as a percentage of sales than we expected (210 bps), as well as lower SG&amp;A (70 bps).</li></ul>

3QFY24 EPS was $0.21 versus a depressed $0.08 in 3QFY23 and above our $0.16 estimate.3QFY24 EBITDA of $5.1 million beat our $4.6 million estimate and was up sharply from $3.3 million a year ago.EBITDA margin of 10.5% exceeded our 8.7% estimate, driven primarily by lower commissions and incentives as a percentage of sales than we expected (210 bps), as well as lower SG&amp;A (70 bps).

LifeVantage Corporation - 3QFY24 Profit Upside on Modest Sales Shortfall

Thematic (Sector/Industry)

<ul><li>Direct selling as a business model has a large global presence.</li><li>According to the World Federation of Direct Selling Associations (WFDSA), approximately 77% of global direct sales were conducted outside the US in 2022.</li><li>Therefore, foreign currency exchange rates can have a significant impact on reported earnings and cash flows for the dollar-based direct selling platforms, such as NUS, HLF, USNA, and LFVN.</li></ul>

Direct selling as a business model has a large global presence.According to the World Federation of Direct Selling Associations (WFDSA), approximately 77% of global direct sales were conducted outside the US in 2022.Therefore, foreign currency exchange rates can have a significant impact on reported earnings and cash flows for the dollar-based direct selling platforms, such as NUS, HLF, USNA, and LFVN.

Direct Sellers - Currency Outlook Remains Mixed

<ul><li>We have updated our models following the company’s 2QFY24 (December) earnings release.</li><li>We are raising our EPS estimates for FY24 (June) to $0.60 from $0.55, FY25 (June) to $0.70 from $0.65, and FY26 (June) to $0.80 from $0.75. Since 2QFY24 beat our previous forecast by $0.06, we are essentially flowing through that upside.</li><li>Our $0.60 EPS estimate for FY24 is toward the lower end of management’s new range of $0.57-0.67, which was raised from $0.52-0.62 at the time of the release.</li></ul>

We have updated our models following the company’s 2QFY24 (December) earnings release.We are raising our EPS estimates for FY24 (June) to $0.60 from $0.55, FY25 (June) to $0.70 from $0.65, and FY26 (June) to $0.80 from $0.75. Since 2QFY24 beat our previous forecast by $0.06, we are essentially flowing through that upside.Our $0.60 EPS estimate for FY24 is toward the lower end of management’s new range of $0.57-0.67, which was raised from $0.52-0.62 at the time of the release.

LifeVantage Corporation - Raising EPS & EBITDA Estimates; Trimming Sales

<ul><li>2QFY24 (December) ongoing EPS was $0.10 versus ($0.07) in 2QFY23 and ahead of our $0.04 estimate.</li><li>Ongoing EBITDA was $3.1MM in the quarter, well above the $0.8MM in 2QFY23 and ahead of our $2.5MM estimate.</li><li>EBITDA margins of 6.0% exceeded our 4.6% estimate.</li></ul>

2QFY24 (December) ongoing EPS was $0.10 versus ($0.07) in 2QFY23 and ahead of our $0.04 estimate.Ongoing EBITDA was $3.1MM in the quarter, well above the $0.8MM in 2QFY23 and ahead of our $2.5MM estimate.EBITDA margins of 6.0% exceeded our 4.6% estimate.

<ul>
<li>Valuations for direct selling stocks remain at or near historical lows following a very difficult year for the group in 2023.</li>
<li>The 12-month prospective relative P/E ratio for our proprietary Direct Selling Index closed 2023 at a 43% discount to the market, having entered the year at a 35% discount to the market.</li>
<li>This relative multiple contraction was despite a slight improvement in the prospective absolute P/E ratio to 11.2x at the end of 2023, up from 10.9x at the beginning of the year, since the multiple expansion for the S&amp;P 500 was much greater, having expanded nearly 3 full multiple points on the year to close out at approximately 19.7x forward earnings.</li>
</ul>


Valuations for direct selling stocks remain at or near historical lows following a very difficult year for the group in 2023.
The 12-month prospective relative P/E ratio for our proprietary Direct Selling Index closed 2023 at a 43% discount to the market, having entered the year at a 35% discount to the market.
This relative multiple contraction was despite a slight improvement in the prospective absolute P/E ratio to 11.2x at the end of 2023, up from 10.9x at the beginning of the year, since the multiple expansion for the S&amp;P 500 was much greater, having expanded nearly 3 full multiple points on the year to close out at approximately 19.7x forward earnings.


Direct Sellers Valuation Update - Relative Valuations Remain at Generational Lows

United States

Lifevantage Corporation is a health and nutrition company that develops dietary supplements. The Company produces nutritional products that are intended to combat oxidative stress to support brain, eye, and joint function, as well as skin canine products.

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Lifevantage (LFVN US)

LifeVantage Corporation - 3QFY24 Profit Upside on Modest Sales Shortfall

EBITDA margin of 10.5% exceeded our 8.7% estimate, driven primarily by lower commissions and incentives as a percentage of sales than we expected...

Water Tower Research

Direct Sellers - Currency Outlook Remains Mixed

According to the World Federation of Direct Selling Associations (WFDSA), approximately 77% of global direct sales were conducted outside the US in...

Water Tower Research

LifeVantage Corporation - Raising EPS & EBITDA Estimates; Trimming Sales

We are raising our EPS estimates for FY24 (June) to $0.60 from $0.55, FY25 (June) to $0.70 from $0.65, and FY26 (June) to $0.80 from $0.75. Since...

Water Tower Research

UPDATE NOTE - LifeVantage Corporation

Ongoing EBITDA was $3.1MM in the quarter, well above the $0.8MM in 2QFY23 and ahead of our $2.5MM estimate. EBITDA margins of 6.0% exceeded our...

Water Tower Research

Direct Sellers Valuation Update - Relative Valuations Remain at Generational Lows

The 12-month prospective relative P/E ratio for our proprietary Direct Selling Index closed 2023 at a 43% discount to the market, having entered...

Water Tower Research

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