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http://seekingalpha.com/article/3345195-will-undervalued-cvsl-prove-to-be-a-multi-bagger?auth_param=kloa7:1aqv121:27b6b8d6fc640c3cc9401e271fea26ef&uprof=45

Will Undervalued CVSL Prove To Be A Multi-Bagger?
Jul. 22, 2015 7:53 AM ET | About: CVSL Inc. (CVSL)
Disclosure: I am/we are long CVSL. (More...)
Summary

Valuation Aberration as Cash Adjusted Market Cap Falls Below $20m.
CVSL Trading At Large Discount to Other Publcly Traded Direct Sales Co's.
CVSL Has Enough Cash to Buy Entire Public Float at 15%+ Premium.
50k+ Sales Force Starting to Get CVSL Stock Ownership.
Expecting Turnaround at Longaberger in Q3.
In investing parlance, a multibagger is a stock that has gained several times its original value. Such investment opportunities are obviously very rare and most often nearly unrecognizable on the front end. We believe that direct sales pioneer CVSL (NYSE: CVSL) could prove to represent such an opportunity. CVSL's stock closed today at $1.03 after trading at the lowest price in its history reflecting what we believe to be a valuation aberration that could result in strong double digit returns and potentially a multibagger for investors buying the stock in today's trading range.

Why is CVSL trading this low?

1) CVSL is a company that did not go public through the traditional IPO capital raising process and as is often the case with such companies, there are no Wall Street analysts providing coverage (or promotion) of the shares. This means it has little if any support from Wall Street or institutional investors. As the company hit a bump in the road operationally with issues related to its largest division (Longaberger),the stock began to decline and this decline was exacerbated by a poorly executed stock offering at $3 per share that caused more dilution than investors expected.

2) The company has been largely judged based on the performance of its largest division (Longaberger), which has been a difficult turnaround situation and drag on the overall company's results. It appears that investors are assuming that the company will not be able to turn that division's fortunes around, but we believe recent steps taken by CVSL management to refocus the company on the basics will lead to a recovery. We think that evidence of this turn will be seen in the results for the current quarter (Q3).

3)The Short Interest in CVSL has increased ten fold and we believe that this selling pressure in addition to the negativity they spread in the marketplace has pushed the stock lower than it might otherwise trade based on its fundamentals. The lack of an authoritative voice on the direction of the company's shares mentioned in number one above results in an information vacuum that allows short sellers to thrive and CVSL stock is now trading down over 90% from its 52 week high and at its lowest price (52-week low of $1.00 today) since the CVSL shell was acquired by John Rochon and Richmont Capital.

We believe the current price is best described as an aberration that will revert to a valuation more in line with the value of the company's assets and potential for growth as more investors become aware of CVSL and what they are doing and/or the turnaround we are expecting with the companies two largest divisions in the latter half of the year becomes more apparent. Investors who can see through the haze of negativity that has developed over the last few months as the short interest expanded should be richly rewarded. To put it simply and better quantify, if CVSL Chairman John Rochon is as successful with this venture as he has been with his other material investments, investors who buy at these levels and hold on for the long term may find they are holding the proverbial multi-bagger.

The Valuation Aberration

Discussion of the valuation aberration mentioned above must start with the value indicated by the current stock price. CVSL's cash/debt adjusted market cap of just under $20 million ($35m market cap adjusted for $22m cash minus $7m debt) based on the current $1.03 stock price is simply ridiculous for a company that is capable of producing $150m in revenue over the next 12 months with margins like the acquisition-expense-adjusted margins CVSL can produce, Such companies will typically trade at some multiple of their revenue, while CVSL is currently trading at a cash/debt adjusted market value of less than .2x its projected revenue. Take note that is not 2x but "point 2 times" its revenue, it is not a typo and it represents a staggering discount to the revenue multiple range one might expect for a company growing like CVSL with similar margins. Thus, CVSL trades at a discount instead of a multiple of its revenue and the current price of CVSL shares represents a disparity much larger than what is usually seen even when the company is facing difficult headwinds. CVSL is so cheap it could be a two or three bagger and still trade at a discount to what most similarly situated companies go for. See the chart below for valuations of other companies in the direct sales space and note that not one of them is growing revenue as fast as CVSL -

Valuation Disparity Chart

Company Price/Sales

USANA - 1.90

Tupperware - 1.27

Herbalife -1.04

Nuskin - 1.01

Youngevity - 1.02

CVSL - 0.20

If investors begin to value CVSL shares in line with the price to sales metric above (approximately 1x revenue) and CVSL continues on the pro forma run rate of the last reported quarter ($32 million in Q1 2015), the 1x revenue would give CVSL a market cap of $128 million and investors at todays closing price ($1.03) would be sitting on a near four bagger as the stock moved up to the $3.75 range.

CVSL's Current Share Ownership Structure + Cash Further Highlights Valuation Aberration

John Rochon and CVSL company management teams control 66% of CVSL stock or approximately 22.6m of the 34.3m shares outstanding. That leaves only 11.7 million shares in the float available to others who might want to invest in the company. Offsetting CVSL's debt (approximately $7m) and its cash (approximately $22m) leaves approximately $15 million in net cash. With only 11.7 million shares outstanding that are not controlled by management and the stock trading at $1.03 per share, that means management could pay a 15% premium to the current trading price to buy the rest of the shares outstanding and still have over $1 million in cash in the bank. Though we do not expect this to happen in the near term, if the stock were to languish at these levels for another quarter it would not be a surprise to see CVSL management using the cash to repurchase CVSL stock. With the smallish public float, it is difficult to imagine how they would be able to acquire many shares without pushing the stock up to the $2-$3 range - a two or three bagger for investors at existing prices.

Building Wealth and Loyalty by Helping Sales Reps Become CVSL Owners Through Stock Incentives

The visionaries at CVSL recognize the current valuation aberration and are taking steps to get some of this cheap stock into the hands of the people who will ultimately determine the success of CVSL - the 50,000+ sales reps across the CVSL companies. Here is a link to one of the programs the company has recently rolled out - Agel's Family Prosperity Plan. We believe that CVSL management will take steps to make similar programs available to the sales reps at all CVSL companies this year. If a significant number of these reps were to take a closer look at the valuation disparity between their company and other publicly traded companies and consider why Mr. Rochon has put these incentives into place (he wants them to be OWNERS), we would not be surprised to see a trend of them making investments in CVSL stock outside of what they can earn through the sales incentives programs. While it would be highly speculative to project how much of that will occur or even to suggest how much capital the 50,000+ sales reps would have to put towards CVSL stock, we note that our conservative projections have the company paying out over $35 million in commissions to sales reps over the next 12 months. If even 1/3 of that amount was reinvested in CVSL stock, it would be more than enough to buy the entire public float of CVSL at current prices. If you instead look at the potential for sales rep/owners and break it down based on the number of sales reps, if only 1/2 of the sales reps bought 500 shares at current prices, that would soak up the entire public float of CVSL. While we have no idea how many of the sales reps are actually savvy enough to invest in CVSL while it is this cheap, we have to think the upcoming conferences (Longaberger this week, Agel in September, etc.) give those reps who do understand the opportunity to spread the word in a way that could allow many more of their associates to profit from the growth of the company they are working to build. So whether its 25,000 reps investing $500 or even two or three thousand reps investing a few thousand dollars each, there is a very real opportunity for sales reps who want to become part owners of CVSL and profit from the John Rochon vision in the way that only hedge funds and professional money managers could in the past.

What could go wrong?

If CVSL management's move to bring in new leadership at Longaberger is not successful, the importance of showing growth at Agel and/or Kleeneze will become paramount. A big part of the CVSL value proposition for potential acquirees is making the acquired companies more profitable and helping them re-establish their growth trajectory. Between the changes made in Q2 at Longaberger and the new product and promotions with Agel, we expect to see much stronger results in Q3 (for Longaberger) and Q4 (for Agel). If this does not occur, the stock could languish though we still think the range would be somewhat higher than the current range due to the factors mentioned above. CVSL ultimately must show it can reignite growth with the acquired companies if the company is going to reach its potential for growth.

Additionally, we want to be very clear that we do not see this as a near term earnings play. In fact, we believe the quarter that just ended will be subpar and expect that it will represent the trough in CVSL revenue for years to come on the heels of what we expect to be a poor showing by Longaberger. Early in Q2 2015 the issues with Longaberger's CEO reached a level that required the company to go in a different direction and we suspect the poor performance of that division and other issues that came to a head during Q2 were a significant enough distraction that it will likely be reflected heavily in the company's performance for the period. A good example of how these issues are being addressed by CVSL leadership is the winding down and closure of the Longaberger outlet stores that were undercutting the Longaberger sales reps. This will surely have a near term negative revenue impact, but we believe this step and the appointment of a new Longaberger CEO are good examples of the positive steps CVSL management has taken that may cause near term pain but should create more value for the sales force and shareholders. Thus, Q2 revenue may be lower, but prudent steps have been taken to adjust the strategic focus back to pushing sales of Longaberger products back to its best asset - the Longaberger sales force.

The recent steps with Longaberger are most encouraging to us in that it speaks clearly to management's understanding of what will ultimately create value for all shareholders over the long term - investing in the success of the sales force at each of the acquired companies. When the sales force succeeds, the company will grow and shareholders will profit handsomely. We are also encouraged by steps we see management taking to get the sales force invested in CVSL as owners. We believe the closer alignment of the sales force's interests with that of shareholders as they become shareholders could be one of the biggest components of the long term CVSL success story. In four or five years we could see this translate to a large class of shareholder/sales reps who have an incentive to stay with the company and watch the value of their ownership stake grow exponentially. The amount of wealth that could be created by their ownership of CVSL stock would be in the many millions of dollars if CVSL succeeds anywhere near the level of Mr. Rochon's other ventures.

In summary, CVSL stock is dirt cheap right now by most measures and we believe this is a near term aberration that will revert to the mean very soon for the reasons indicated above. We believe that investors who buy at current levels should easily earn double digit returns on their investment in the current calendar year due to this reversion alone and those who hold for 12-18 months could earn 2-3X their money. Investors who are patient enough to give it 3-5 years could find they are holding the proverbial multibagger, as the valuation discount disappears and CVSL management executes a growth strategy that could grow CVSL into a $300million+ revenue company giving investors at today's prices a 4-5 bagger and possibly more.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Additional disclosure: My intent in publishing this article is to inform investors about developments related to CVSL. I did not and do not intend to suggest any specific action by any investor or shareholder and strongly suggest that any decision made to buy or sell shares of this stock be made after consultation with an investment advisor as to the suitability of such an investment. I currently own shares of CVSL outright and in some managed accounts. I may buy or sell shares at any time based on market conditions and the trading price of CVSL.