I started covering A.L. International last year when the merger of Youngevity and Javalution formed this new company. At the time in reviewing their financials I was pretty sure they would hit $100 million by the end of 2012. Well I may be off by $30 million, but 2013 should bring a whole new dynamic to this powerful and growing company.
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Combination of national and foreign direct marketing engine fueled by increasingly wide product line in rapidly growing Health & Wellness sector – all spearheaded by a unique niche in fortified coffee market – should grow revenues well beyond the $100 million mark
• With Q2 2012 results now released, AL International has completed its first full year as a newly created company and, more importantly, one of the few “Pink Sheet” listed equities that offer investors fully audited accounts prepared under GAAP. The recent Mayer, Hoffman & McCann audit is a major step towards management’s eventual goal of taking the company off the PinkSheets and re-listing on the Bulletin Board, and ultimately to even a higher exchange. . We believe the listing on a higher, fully reporting exchange will be a major catalyst for the stock introducing the company to a vastly broader investor market.
• On the upside, in Q2 2012 the firm’s top line revenues and EBITDA more than doubled compared to Q2 2011 – far exceeding our initial estimates made last February. In fact, AL International is now past the half-way mark of becoming a $150 million annual revenue company by 2014 – which was our most aggressively optimistic, best case scenario at the start of 2012. For start-up micro cap firms, particularly in the highly volatile Heath and Wellness sector, we believe that revenue growth is the key driver behind share price and a major factor in deciding which firms stagnate and flounder as opposed to which firms can potentially become the next Herbalife.
• On the downside, the firm recorded a substantial Net Loss of $1.2 million for the first half of 2012.
However, this loss is due almost exclusively to a non cash accounting charge: the ongoing write down of net intangible assets following the creation of the company last year. As a point in fact, operating cash flow in Q2 2012 dramatically increased some 12-fold from Q2 last year after the creation of the company involving the reverse merger of its major components Youngevity Essential Life Sciences and Javalution. Further, cash and cash equivalents has more than doubled since the start of the year and EBITDA of $472,000 for Q2 2012 has already started to aggressively bounce back from an EDITDA loss of $134,000 at the end of Q1.
• We are maintaining our Price to Sales (P/S) based fair valuation that suggests a price range for AL International stock at between $0.45 and $1.54. In spite of the recently reported losses 1H 2012, threat of significant stock dilution and current weakness in liquidity, we believe the completion of the GAAP audit by a Top 10 US accounting firm, eventual listing on a larger exchange and continued aggressive growth in revenues since the merger last year will represent a major catalyst for a stock price re-rating. We rate the company a Speculative Buy, acknowledging that there are risks to our projections at this early stage of a newly formed direct sales company which is spending aggressively to build brand equity and rapidly expand its product line and distribution network in both the US and Asia..
Growth Spearheaded by Fortified Coffee
AL International’s lead coffee product line is Javalution, which brings to the table an established and readymade entry-way into one the hottest growing consumer segments today: specialty fortified coffee including branded and private label. Private label beverages now account for over 17% of the $500 billion-plus US market for food and beverages. On top of this is the added marketing twist that the Javalution product line is produced and marketed to appeal specifically to the Health & Wellness consumer segment. The rapidly emerging market for fortified coffee has barely been touched. Judging by the explosive growth of such brands as Sobe, Vitamin Water, and MonaVie, there is clearly enormous upside potential to build a national as well as international distribution business spearheaded initially by fortified coffee. The coffee segment makes up 12% of the company’s total revenue.
Direct Sales growth driven by 90 for Life campaign
In October of 2011 the company re-packaged the presentation of its core product line via a campaign known as 90 for Life. The three products that make up the 90 for Life Healthy Start Pack are Beyond Tangy Tangerine, Osteo FX Plus and EFA. These products along with coffee are the leading sales generators for the company. Beyond Tangy Tangerine, alone, now generates almost 2 million in monthly revenue. The direct sales model is highly flexible both on the upside and downside. On the downside in weak consumer markets, AL International should outperform in comparison to traditional competitors. AL benefits from low overheads and fixed costs, limited compensation expenses and limited capex requirements. On the upside, the firm is steadily adding to its existing network of 50,000 direct sellers as well as the 400-plus range of products. Further, the network has strong potential to grow outside the US – particularly in Asia where the direct sales model is extremely well established among consumers.
Network Sales Cloud
The retail sales marketplace is slowly but steadily taking up a second residence in e-commerce and social networks. The network sales cloud concept pioneered by Amazon can readily be adapted by AL International. Amazon started building a core base of clients through on-line book sales – but then added an ever expanding list of product categories. Thus, by initially grabbing a consumer through a book purchase, the consumer could then be incentivized to purchase any one of the thousands of products available in the Amazon sales cloud. Similarly, by initially grabbing a consumer through a purchase of the 90 for Life Healthy Start pack or fortified coffee, AL International can then follow up with the sales and marketing of the 400-plus product line in the Health & Wellness sector. Continually building the distribution network by adding more qualified agents while simultaneously adding to the product line is the key priority for management.
Recession Proof Business Model
The low fixed cost and potentially high margin structure of the firm’s operations make it particularly well placed to grow during flat or falling economic cycles. The relatively high gross margins in direct selling have acted as an effective buffer against the recent dramatic rise in commodity cost inflation. While input cost inflation has hit the bottom line of many retailers, by comparison direct selling companies have actually been delivering gross margin expansion. In the firm’s most recent earnings release, revenues have in fact expanded significantly despite a continued moribund consumer environment.
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