BLYTH INC BTH
May 02, 2012 - 11:02am EST by
devo791
2012 2013
Price: 83.00 EPS $0.00 $8.00
Shares Out. (in M): 9 P/E 0.0x 10.4x
Market Cap (in $M): 711 P/FCF 0.0x 0.0x
Net Debt (in $M): -119 EBIT 0 0
TEV ($): 592 TEV/EBIT 0.0x 0.0x

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  • Understated Earnings
  • International growth
 

Description

Blyth is a direct sales marketer whose value largely stems from its ownership of Visalus (over 80% of the company), a business which has been growing at a ~200% organic rate, a rate of growth which has actually been accelerating in 2012.  Amazingly, despite this hyper growth rate and huge untapped international opportunity the company trades for only around 8.3x 2012 earnings (assuming full ownership of Visalus, which will occur in 2013) of around $10 per share.  Due to having zero analyst coverage and a very non-promotional management team, I believe that investors have simply not woken up to how large Visalus actually is now.  Fortunately, members of the Visalus management team disclose each month the number of people that have “joined the challenge” -- i.e. started to subscribe as customers.  Using a multitude of publicly disclosed data points in conjuction with reported BTH results, I have been able to reverse engineer a fairly accurate model for predicting Visalus revenues based on these figures.  As of April, Visalus should now be up to $58 M in monthly revenues, a $700 M revenue run-rate, obviously massive growth over the $230 M they just did in 2011.

Importantly, I believe that the reporting of Q1 results in the next week, perhaps as early as in the next few days, serves as an imminent catalyst as I expect management to materially increase their earnings guidance for the year from $5.00 - 5.25 to over $6.00.  Due to the time sensitive nature of this recommendation, this report will probably be a bit briefer than I’d like, but I’d be happy to follow up on details in the discussion thread.

Roughly speaking, BTH’s enterprise value roughly consists of Visalus (80-85%), PartyLite Europe (10%), and another 5-10% spread among Party Lite North America, a catalog/internet business selling household goods and other knick knacks, and a chafing fuel/table top lighting business.  As a result this write up is entirely focused on my Visalus expectations as the other businesses don’t really move the needle at this point.

Please refer to hb190’s excellent writeup of BTH last October (http://valueinvestorsclub.com/value2/Idea/ViewIdea/58596) for more details on the Visalus business, and why it is well positioned to realize the huge future growth outside of North America.

The company reported year-end results in March and gave guidance of $5.00 - 5.25 in earnings for 2012.  At the time I believe that management was clearly low-balling as the business was on pace to easily do $7 per share.  Furthermore, as I shared in the comments to the prior BTH writeup, the company’s own internal expectations for the final earnout payment for Visalus imply substantially greater earnings than $5.25!  If you calculate the Visalus EBITDA implied by their earnout expectation, they believe that BTH will earn at least $6.30 in EPS in 2012 (and that’s assuming share declines in the other businesses, which is probably overly conservative).  I guess the auditors won’t let you use unrealistic projections when disclosing to shareholders the size of a potential cash earnout, but you can certainly release unrealistically low earnings guidance to shareholders!
Since then, Visalus has actually accelerated it’s growth rate considerably.  They had just done around $41 M in revenues in February, but during the month of March they added 159k customers -- 40% more than they added in the previous month!  I believe this has fueled growth from $41 M in February to $50 M in March to around $58 M in April -- a revenue run rate that is over 40% higher than when they just gave full-year guidance a few months ago.  I now believe the company will do around $8 per share in EPS in 2012, and while I expect management to remain conservative and low-ball investors, I think the huge acceleration in the growth rate of the business will force them increase guidance to at least $6 per share in the next week.

To get from $8 per share in EPS in 2012 to the $10 per share I cited in the opening paragraph, I am merely ascribing 100% ownership of Visalus to BTH (they are presently at 73% but an earnout payment next year will take them to 100%) and adding interest expense costs incurred from the financing of this final earnout.

Finally, while the imminent catalyst of an increase in earnings guidance is the main attraction to this investment and gives it an outstanding risk/reward, I should note that BTH is clearly undervalued as well and is worth at least $145 per share, without even factoring in the huge potential international growth opportunity within Visalus.  That valuation is comprised of around $108 per share for Visalus (10x the current run-rate EBIT, obviously you could argue for a much higher valuation considering the growth rate), $16 per share for PartyLite Europe (6x EBIT), $4 per share for PartyLite North America (2.5x EBIT), $3 per share for catalog/internet (probably less than asset value) $2 per share for chafing fuel/tabletop lighting (probably less than asset value), and $14 per share in cash.

Catalyst

An increase in 2012 earnings guidance when Q1 reports are reported in the next week
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    Description

    Blyth is a direct sales marketer whose value largely stems from its ownership of Visalus (over 80% of the company), a business which has been growing at a ~200% organic rate, a rate of growth which has actually been accelerating in 2012.  Amazingly, despite this hyper growth rate and huge untapped international opportunity the company trades for only around 8.3x 2012 earnings (assuming full ownership of Visalus, which will occur in 2013) of around $10 per share.  Due to having zero analyst coverage and a very non-promotional management team, I believe that investors have simply not woken up to how large Visalus actually is now.  Fortunately, members of the Visalus management team disclose each month the number of people that have “joined the challenge” -- i.e. started to subscribe as customers.  Using a multitude of publicly disclosed data points in conjuction with reported BTH results, I have been able to reverse engineer a fairly accurate model for predicting Visalus revenues based on these figures.  As of April, Visalus should now be up to $58 M in monthly revenues, a $700 M revenue run-rate, obviously massive growth over the $230 M they just did in 2011.

    Importantly, I believe that the reporting of Q1 results in the next week, perhaps as early as in the next few days, serves as an imminent catalyst as I expect management to materially increase their earnings guidance for the year from $5.00 - 5.25 to over $6.00.  Due to the time sensitive nature of this recommendation, this report will probably be a bit briefer than I’d like, but I’d be happy to follow up on details in the discussion thread.

    Roughly speaking, BTH’s enterprise value roughly consists of Visalus (80-85%), PartyLite Europe (10%), and another 5-10% spread among Party Lite North America, a catalog/internet business selling household goods and other knick knacks, and a chafing fuel/table top lighting business.  As a result this write up is entirely focused on my Visalus expectations as the other businesses don’t really move the needle at this point.

    Please refer to hb190’s excellent writeup of BTH last October (http://valueinvestorsclub.com/value2/Idea/ViewIdea/58596) for more details on the Visalus business, and why it is well positioned to realize the huge future growth outside of North America.

    The company reported year-end results in March and gave guidance of $5.00 - 5.25 in earnings for 2012.  At the time I believe that management was clearly low-balling as the business was on pace to easily do $7 per share.  Furthermore, as I shared in the comments to the prior BTH writeup, the company’s own internal expectations for the final earnout payment for Visalus imply substantially greater earnings than $5.25!  If you calculate the Visalus EBITDA implied by their earnout expectation, they believe that BTH will earn at least $6.30 in EPS in 2012 (and that’s assuming share declines in the other businesses, which is probably overly conservative).  I guess the auditors won’t let you use unrealistic projections when disclosing to shareholders the size of a potential cash earnout, but you can certainly release unrealistically low earnings guidance to shareholders!
    Since then, Visalus has actually accelerated it’s growth rate considerably.  They had just done around $41 M in revenues in February, but during the month of March they added 159k customers -- 40% more than they added in the previous month!  I believe this has fueled growth from $41 M in February to $50 M in March to around $58 M in April -- a revenue run rate that is over 40% higher than when they just gave full-year guidance a few months ago.  I now believe the company will do around $8 per share in EPS in 2012, and while I expect management to remain conservative and low-ball investors, I think the huge acceleration in the growth rate of the business will force them increase guidance to at least $6 per share in the next week.

    To get from $8 per share in EPS in 2012 to the $10 per share I cited in the opening paragraph, I am merely ascribing 100% ownership of Visalus to BTH (they are presently at 73% but an earnout payment next year will take them to 100%) and adding interest expense costs incurred from the financing of this final earnout.

    Finally, while the imminent catalyst of an increase in earnings guidance is the main attraction to this investment and gives it an outstanding risk/reward, I should note that BTH is clearly undervalued as well and is worth at least $145 per share, without even factoring in the huge potential international growth opportunity within Visalus.  That valuation is comprised of around $108 per share for Visalus (10x the current run-rate EBIT, obviously you could argue for a much higher valuation considering the growth rate), $16 per share for PartyLite Europe (6x EBIT), $4 per share for PartyLite North America (2.5x EBIT), $3 per share for catalog/internet (probably less than asset value) $2 per share for chafing fuel/tabletop lighting (probably less than asset value), and $14 per share in cash.

    Catalyst

    An increase in 2012 earnings guidance when Q1 reports are reported in the next week

    Messages


    SubjectPartylite multiples too low
    Entry05/02/2012 02:06 PM
    Memberconway968
    I think your Partylite valuation is too low. 
     
    Given the business model (roughly 20% CoGS, 40-50% selling expense), there is no reason why a $500mm company can't do mid-teens EBIT margins.  As disclosed in the proxy, Anne Butler was given a $70.3mm EBIT target for FY2012 Partylite Global.  That target is totally reasonable for the business.  She missed it by a long shot, which is probably why Bob Goergen, Jr. has replaced her as head of the company. 
     
    They took some restructuring charges last year and have more budgeted for this year.  The challenge seems to be right-sizing the cost structure to $500mm (a rev number that appears to be bottoming) for a business that was once $1B.  This seems doable. 
     
    I would either model some margin expansion or use higher EBIT multiples. 

    SubjectRE: Q1 results
    Entry05/04/2012 02:02 PM
    Membercasper719
    Thanks for the update. Is Goergen just completely inaccessible? What's in it for him in sandbagging the earnings estimates? 
     
     

    SubjectInternational expansion, recent US trends
    Entry06/18/2012 10:45 AM
    Memberghostly
    It looks like Visalus has been ramping up its international expansion planning capacity recently, with several new hires in the last few months coming from MLMs that have successful international businesses (see the Linkedin profiles of Aldo Moreno who set up Herbalife's global IT infrastructure, Paul Noack who set up Herbalife China, Lyon Kassab, Addison Raymond and others).
     
    Do any of the members who follow BTH have a sense for how long it might take to go from the planning stage to launch stage in a new country?
     
    Also any updates on growth trends in the U.S. in the last few months?
     

    SubjectRE: RE: International expansion, recent US trends
    Entry06/18/2012 12:35 PM
    Memberghostly
    Interesting stuff, thanks for that devo, appreciate it.

    SubjectMLM's = Fraud
    Entry08/17/2012 03:52 PM
    Membercnm3d
    How is ViSalus any different from other MLM pyramid schemes. In particular, doesn't eyeball popping growth from an MLM typically indicate a rapid expansion of users in the pyramid that is likely unsustainable?
     
    Also, aren't diet-related companies (if you actually think ViSalus is a diet company, not a ponzi scheme) very seasonal, so that Q1 and Q2 revenues out pace the second half?
     
    You know, perhaps it's just that Warren Buffett conservatism in me, but most investments I look at don't have to explain to me why they aren't a ponzi scheme.
     
    Then again, Scott Zlateff, the self-proclaimed "Internet's Sexiest Marketer", doesn't think it's a scam. http://scottzlateff.com/mlm-companies/visalus-scam-review/
     
     
    On a side note, my favorite part of the MLM scam is that if you search for something like "ViSalus scam", what comes up are a dozen people informing you that ViSalus isn't a scam... and then attempting to get you to sign up through them.
     
     
    If they IPO ViSalus at 18x earnings, will be a great short.

    SubjectRE: MLM's = Fraud
    Entry08/17/2012 04:06 PM
    Membercuyler1903
    Great post and agree 100%.  Well done.
     
    Cuyler

    SubjectRE: RE: MLM's = Fraud
    Entry08/17/2012 04:37 PM
    Membercnm3d

    SubjectRE: RE: MLM's = Fraud
    Entry08/18/2012 01:58 PM
    Membercnm3d
    It sounds like a incredible business opportunity to help people feel better and live healthier lives while at the same time taking control of your future through the power of residual income! Did you know that only 3% of Americans benefit from residual income? (Sourece: ViSalus CEO Blake Mallen Youtube video.) I trust you've signed up.
     
    Did you get the Executive Success System (ESS) for $499 or did you get the ESS with samples for $999? Now, you can also sign up to be a distributor for $49, but that is really only for those testing the water. If you are serious about taking control of your future, you need to spend for the ESS.
     
    So, as I'm sure you are aware, purchasing the ESS makes you an Associate and makes you a part of the ViSalus team. But for those who haven't yet joined the revolution, I thought I'd explain how this incredible opportunity works. Becoming an Associate enables you to get paid every time you sell someone else an ESS. At first, as an Associate, you get paid $50 for every ESS you sign up. (I know ESS technically refers to the system, not the new associates, but ViSalus seems to use them interchangeably.) Here's the kicker. Now that you've signed up three ESSs (Visalus is very big on sets of three), you now receive a bonus from every additional ESS that the ESSs under you sign up! Just how much money can you make from the ESSs under you? As a Regional Director, you get paid $130 for every ESS you sign up and $80 when an Associate or Director in your "tree" signs up a new ESS!!
     
    Now there's two important things I haven't mentioned. First, while buying an ESS enters you into the program, you have to become "active." How does one become active? By having $125 of recurring monthly product sales or $200 of one time sales. These sales can be from anyone. It can be your personal purchases, purchases for your customers, or purchases by your customers. It's very important that you remain active, or you won't be eligible for any bonuses. Second, to become a Director, you need to be active, have three active legs under you, and generate $2,000 in total group volume. Further, it's important to try to become a Director in your first thirty days. That makes you a Risisng Star, which enables you to earn additional bonsuses FOR LIFE!!
     
    By purchasing an ESS, you are putting YOU in control of your future!
     
     
     
    I, too, can read the S-1 and regurgitate it onto the message board. As you cleverly point out, Berkshire does own a direct selling business. There's nothing directly wrong with direct selling (pun!); there is something obviously wrong with a system where you make a ton of money signing other people up for the system, and then even more money from those new sign ups, but very little money from selling the product. While the USA is embarassingly lax in enforcement, there are laws that prevent MLM's from becoming a ponzi scheme and numerous MLMs have been closed. ViSalus has grown from $30MM in sales in 2010 to an annualized pace of +$700MM in just a year and a half. In my opinion, the odds that they have done this without running afoul of the law are very, very low.
     
    This company sells energizing diet shakes... are you serious? As AAOI points out, this is at BEST a fad and at worst a scam. 
     
    And just for the record, ViSalus is IPOing under the JOBS Act, which means they have lower audit requirements. I put almost zero value in their customer vs. distributor numbers.
     
     
    For anyone that wants to learn more, here are ViSalus's videos, where the CEO explains how the compensation scheme works: http://www.youtube.com/user/iWeightLossCom/videos .
     
     

    SubjectRE: RE: RE: MLM's = Fraud
    Entry08/18/2012 03:26 PM
    Membercuyler1903
    Boom.  You are hitting the nail on the head repeatedly here.  
     
    Here's the JOBS Act segment from the S-1:

    As a company with less than $1 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, which we refer to as the “JOBS Act.” As an “emerging growth company,” we may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These exceptions include:

     

      n  

    a requirement to disclose only two years of audited financial statements, selected financial data and related Management’s Discussion and Analysis of Financial Condition and Results of Operations;

     

      n  

    reduced disclosure about our executive compensation arrangements;

     

      n  

    no requirement to hold nonbinding advisory shareholder votes on executive compensation or golden parachute arrangements;

     

      n  

    an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002; and

     

      n  

    the option to use an extended transition period for complying with new or revised accounting standards.


    SubjectBest Compensation Agreement Ever
    Entry08/20/2012 07:55 PM
    Membercnm3d
    "If Mr. Goergen’s employment is terminated due to his death or disability he will receive continued base salary payments through July 31, 2015. "

    Nothing quite like paying a dead guy $750k a year...

    Subjectrepost
    Entry08/28/2012 08:12 PM
    Membercnm3d
    Repost from the other thread:
     
     
    1) Why is Nick Sarnicola (one of the founders) over 50% of ViSalus sales? According to a January 2010 press release, he only joined the distributor ranks then. http://www.prweb.com/releases/2010/01/prweb3436074.htm  How is one guy's pyramid over half of sales?
     
    2) While the company says customers order directly from ViSalus corporate, distributors are in fact encouraged to take on product for customers. ViSalus has an entire set of rules on taking product retail to sell wholesale. That product can be purchased and counted towards your monthly revenue goals to remain "active." Why does anyone here think that is not happening?
     
    3) If the company really makes all of it's money from consumer sales, why does the CMO and founder Blake Mullen specifically state that distributors can expect the majority of their paycheck to come from signing up new associates: http://www.prweb.com/releases/2010/01/prweb3436074.htm . Isn't paying distributors more money for signing up new members than for selling product specifically one the criteria the FTC screens for in pyramid schemes?
     
    4) ViSalus pays First Order Bonsuses, which encourage distributors to sell excess inventory to new associates. ViSalus pays a 20% commission on those sales regardless of size, whereas regular product sales must meet $1,000 to reach the 20% threshold and that $1,000 is subject to the $200 minimum. The FTC specifically cites "inventory loading", where initial customers are encouraged to take on too much inventory for the benefit of those up the chain, as a prohibited activity.
     
    5) How do you get comfortable with the customer numbers? ViSalus defines a reported customer as anyone who has purchased from ViSalus in the past 12 months. If you average ViSalus's customers per Q (or H) and assume $500 in additional revenue per incremental promoter (cost of an ESS... an admittedly crude adjustment), it looks like the average customer spend $60-$125 per month (numbers are lumpy). HOWEVER, most of the customers probably order for less than 6 months, conservatively. Diet products are notoriously faddish and people join and drop quickly. This means the average monthly order per customer is, according to these numbers, somewhere between $120-$250 conservatively. This seems an awfully high number for diet and energy drinks. I'd like to mention that MLM's are notorious for not keeping accurate records of in-network vs. out of network sales. Further, if less than 50% of the sales are not sold out of network, the FTC is likely to consider it a pyramid scheme. (I'm also likely understating the new distributor revenue affect, as average purchase is probably greater than $500 and distributor churn is likely high.)
     
     
    And finally... for those that signed up to be distributors, how much money did you make? :)
     
     
    PS - 
    I should clarify question 5 actually. I get that ViSalus prices products between say $50-$300 (http://visalus.com/docs/corporate/D1053US_BBVCustomerApp.pdf). What I doubt that there are one million Americans paying ~$175 for a period of 6 months to buy ViSalus. I think there are far fewer real customers and most of their revenues are coming from distributors, who often buy up additional units at first to make their numbers look better. ViSalus has a special incentive program for this; it's called their Rising Star Program for Associates who make Director in their first month. 
     

    SubjectRE: RE: RE: RE: MLM's = Fraud
    Entry08/28/2012 08:51 PM
    Membercnm3d
    Devo,
     
    If you think you can't just sign a bunch of people up for ViSalus and expect to get rich, you are ignoring quite robust evidence (like Visalus's pay structure) which shows the opposite. If you seriously believe that, please answer some of the questions I have posted.
     
    You mention NUS repeatedly. NUS has ~200k distributor in the US after existing for almost 20 years. ViSalus got to 120k in 1.5 years. Doesn't that speed seem a little odd?
     
    Diet shakes are the easiest ponzi-MLM to start because they require almost no start up costs. It's a simple product with easy to indentify benefits. Of course drinking  250 cal diet shakes instead of eating a full meal causes you to lose weight. They are also the fastest to go away, mainly because there are zero people who actually like/want the shakes at the price point they are offered. Seriously... do you really think three guys who worked at an MLM selling long distance phone service found a miracle diet with zero education in medicine, nutrition, or for that matter, cooking?
     
    And if you don't think the JOBS Act makes fraud easier, you haven't spoken with someone who works as auditor about it.

    SubjectRE: RE: RE: Insiders
    Entry10/04/2012 03:53 PM
    Membergordon703
    Ok, I missed that change. Fair point. thanks.

    SubjectRE: Short view?
    Entry11/07/2012 11:15 AM
    MemberWinBrun
    I have a general question on the "International Opportunity"-maybe someone can explain to it me-why does this specific business model work internationally? It seems a lot investors assume it will work internationally because others have worked internationally.  But, Visalus seems to rely heavily on social media/event hype (Vitality) etc.   Can someone lay out of a cogent pitch as to why this specific model will play in Europe/China/Japan/Brazil or any other big international market? Thanks.   

    SubjectRE: RE: RE: Short view?
    Entry11/07/2012 01:31 PM
    Membercnm3d
    The short view would be:
     
    1) Shakes are one of the easiest MLM to start up and they are the easiest to fizzle, often to a zero when the promoters typically move on to another business dedicated to ripping off the hopeful and naive. (like what the Visalus founders did after their long distance telephone mlm blew up)
    2) Visalus provided lucrative incentives to attract new promoters quickly, but all the promoters will just leave for the next fast moving scam if/when Visalus ever focuses on margins.
     
    I don't have a position here and am not following the minutia of the story anymore , but these guys are dogs. They run a business that actively hurts people. Why do you think they won't be willing to screw over their investors? What multiple do you put on a thief?

    SubjectRE: RE: RE: Short view?
    Entry11/07/2012 02:28 PM
    MemberWinBrun
    Devo,
     
    Thanks for the response.  So basically the answer is that it should work because others have worked.  Any idea about the failure rate of international expansion (i.e. strip away survivor bias) for MLMs.  Do most fail internationally?  Or any thoughts on which countries make the most sense?  Are they going to China, Europe, Japan, South Korea-how does the macroeconomic environment in those countries have any effect on the potential to grow the business? These seem like huge issues now, especially if growth in the US stalls/ is stalling.  Obviously, social media is not purely a North American thing. But, if they are planning on taking China, I wonder how a revenue stream like the ViNet subscriptions works or if the social media component changes-thereby weakening the community component of the Challenge.  Thanks
     
     

    SubjectRE: RE: RE: Philosophical question
    Entry12/28/2012 12:54 PM
    Membermajic06
    "Mostly, I was trying to make a point about whether these companies belong in the pantheon of value investments, since they clearly -- to me at least -- have huge catastrophe risk in the pyramid collapsing or the company getting shut down. "
     
    There is absolutely "0" risk here.  It's very much like a binary litigation stock or biotech.  Many would argue that those can't be value investments either.  We've had this debate on VIC before (not you and me but others).
     
     

    SubjectRE: RE: RE: Philosophical question
    Entry12/29/2012 03:49 PM
    Memberconway968
    I am not going to engage all aspects of this thread, but would like to make an observation, which I will limit to Visalus rather than MLMs generally, not all of which I have studied:
     
    The "Visalus is a scam, money-losing distributors are exploited victims" line of reasoning is just a specific case of a general condescending attitude that the elites (as they see themselves, though they would never admit it) have toward ordinary people taking risk in this economy.  I haven't heard anyone call Bill Ackman an exploited victim because he lost money buying JCP at too high of a price or  TGT calls or golf courses or whatever.  People lose a lot more money in the stock market than they do in MLMs.  Apparently elite people are allowed to fail at business ventures without a crime having taken place.  There is a lot of talk on this thread about MLM "deceptive marketing practices," but not many firm examples.  Most Visalus distributors I have observed a) understand the basics of the compensation scheme, in particular, that they will not make money without personal or down line sales b) are not under the impression that becoming the next Nick Sarnicola is as easy as buying a $1k platinum promoter kit.  The most common reason people lose money on Visalus is that they sign up as a distributor, but don't follow through with the "getting started" program because, for example, a) they never really wanted to promote Visalus but felt pressured by a friend b) as they call their friends and experience push back and rejections, they realize that network marketing is not for them c) they are people who are not good at following through on plans, as is often evidenced elsewhere in their lives.  To call these people victims and then propose paternal regulations to prohibit such losses is to deny the talented entrepreneurs indistinguishable within their ranks an opportunity to move up in the world because they lack the requisites (HBS degree?) that the paternalists would require to take risk.  

    SubjectRE: RE: RE: RE: Philosophical question
    Entry12/29/2012 04:24 PM
    Memberzzz007
    Agree w/conway.  Also find it particularly ironic that Ackman was one of the world's biggest bulls on Prepaid Legal before he blew his first fund up.  Apparently, as he's gotten more wealthy, he's become more paternalistic towards the great unwashed masses.

    SubjectOutrage
    Entry12/31/2012 02:33 PM
    Memberzzz007
    Something about much of the outrage over investing in MLM companies strikes me as false.  If you're truly a morally-driven investor then, fine, you deserve your soapbox.  However, if you've ever invested in a tobacco company, a defense company, or a alcoholic beverage company then you don't have a leg to stand on.
     
    The number of lives that have been ruined by alcoholism and/or tobacco is many multiples of the number of lives that have been ruined by MLMs.  Both sell a product/service that is legal, but that has the potential to spread pain and misery.  If HLF is operating a pyramid scheme per FTC definitions, than they're afoul of the law.  If they (or BTH) is simply selling overpriced diet powder and exploiting distributors' personal relationships (and associated social pressure) to do so, though, then so what?  The diet powder is less insidious, and no more expensive, than a serving of hard alcohol or a few smokes.
     
    I don't have a problem with somebody shorting a stock, and talking their book, but give me a break on claiming that you're doing it for social justice purposes.  In their last 13F, Pershing's 4th largest position was BEAM.
     

    SubjectRE: RE: RE: Ackman's presentation
    Entry12/31/2012 02:47 PM
    MemberRightlanedriver
    I half-listened to the whole presentation (had it on in the background while doing other things), so maybe I missed the answer to this question, but... is it possible that a large percentage of the lower level distributors are really just customers that took on the distributor title in order to get discounts on product they intend to consume themselves? If that's the case, it kills the ackman thesis, which I thought was based on a relatively rigid litmus test ("ha-ha, our adjustments suggest that greater than 50% of sales are to the channel!")
     
    Could see the math getting fudged in either direction on all of these MLMs.
     
     

    SubjectRE: RE: RE: RE: Ackman's presentation
    Entry12/31/2012 03:11 PM
    MemberRoboCop
    Rightlanedriver,
     
    Ackman's presentation did cover the topic about customers becoming distributors in order to internally consume the product at a discount. 
     
    The presentation stated that customers could easily purchase the product from Ebay for a 30-40% discount which is greater than the 25% distributor discount, so therefore most low end distrubitors are purchasing product to chase the dream instead of for internal cosumption. 
     
    There were also some points about minimum purchase requirements to be eligible for each distributor level, which the presentation concluded was the primary driver of sales (instead of retail demand). 
     
     
    I don't have a position in this one either way, but as far as the soapbox issue, I will say there is an element  of deception to the MLM product where people truly think they will have better lives from signing up to the scheme that doesn't quite exist for products like alcohol and tobacco, where for the most part, consumers are aware of the potential harm. 
     
     

    SubjectRE: Cat risk
    Entry12/31/2012 07:10 PM
    Memberkerrcap
    This is in response to jgalt. Ackman did not prove that HLF is an illegal pyramid scheme. He made a variety of statements involving pyramids, FTC advisories, and HLF's business model, and brought a lawyer to speak for 15 minutes on the topic. He did prove a few things. He made it clear that HLF is a pyramid scheme. He made it clear that the FTC has certain definitions for a pyramid scheme, and he made it clear that the FTC may bring action against certain pyramid schemes. He did not demonstrate that HLF operates a pyramid scheme that the FTC would be able to bring an enforcement action against because they are violating federal law. Here's a parallel. Check out this website: http://www.hitpieceresearch.com/Legal%20Review.htm. It's a website set up by some investor who was long fake Chinese companies in which he attacks short sellers (incidentally, we're slandered in the "updates" section). Go to Section 9, article h: "It shall be unlawful for any person, by the use of the mails or any means or instrumentality of interstate commerce or of any facility of any national securities exchange, to use or employ any act or practice in connection with the purchase or sale of any equity security in contravention of such rules or regulations as the Commission may adopt, consistent with the public interest, the protection of investors, and the maintenance of fair and orderly markets-- 1. to prescribe means reasonably designed to prevent manipulation of price levels of the equity securities market or a substantial segment thereof" Isn't that what Ackman did? He put forth a presentation that manipulated security price levels! He's violating Section 9, Article H of the Securities Act! Where is the SEC?? Obviously, Ackman is in no way breaking the law, because the law is much more nuanced than taking some federal act, or legislation or advisory, and crudely finding a contravention of it, and saying that a criminal act has occurred. Rather, one ought to pay attention to court precedents, and to break the law one must be either violating these court precedents, or an activist FTC / SEC may bring an enforcement action in an attempt to establish a new precedent for something they believe ought to be illegal, and then a court will decide whether the FTC's case is justified. I don't think Ackman got close to demonstrating that HLF is violating the complex laws that have evolved over the years via court precedents and federal legislation and now regulate multi-level marketing. Separately, and this is a point that has yet to be brought up, I'm not sure the FTC wants to shut down MLMs, because we don't live in a country where the federal government polices how you can choose to fritter away your savings, which is the reason why there are no federal bans against payday lenders or casinos. Both are materially more harmful to society than MLMs. I'm not saying that HLF isn't violating the law, but I'm still waiting for someone to actually show me a coherent legal argument demonstrating that HLF is breaking a law. The Pershing Square presentation didn't do it, nor does www.factsaboutherbalife.com. Finally, if you're short or long HLF, the core of your thesis shouldn't rest on what the FTC does. The US is 20% of HLF's business, and shrinking. You take the entire US operations away and HLF is trading at 5x EBITDA instead of 4x. It's headline risk, not fundamental risk. So between (a) there likely being no actual legal case to be brought against HLF, (b) no motivation for a federal agency to shut down an MLM like HLF because in America, regulations governing how consumers can waste their money is typically not a federal issue but a state issue and (c) even if the FTC did bring an action, the US is too small a part of their business, I believe that the whole HLF-will-get-shut-down-by-the-government argument makes for a weak short argument. FYI we're long HLF

    SubjectRE: RE: Cat risk
    Entry12/31/2012 07:24 PM
    Memberkerrcap
    Oops, VIC turned my separate paragraphs into one long stream of consciousness. Let's try re-posting:
     
    This is in response to jgalt. Ackman did not prove that HLF is an illegal pyramid scheme.
     
    He made a variety of statements involving pyramids, FTC advisories, and HLF's business model, and brought a lawyer to speak for 15 minutes on the topic. He did prove a few things. He made it clear that HLF is a pyramid scheme. He made it clear that the FTC has certain definitions for a pyramid scheme, and he made it clear that the FTC may bring action against certain pyramid schemes. He did not demonstrate that HLF operates a pyramid scheme that the FTC would be able to bring an enforcement action against because they are violating federal law.
     
    Here's a parallel. Check out this website: http://www.hitpieceresearch.com/Legal%20Review.htm. It's a website set up by some investor who was long fake Chinese companies in which he attacks short sellers (incidentally, we're slandered in the "updates" section).
     
    Go to Section 9, article h: "It shall be unlawful for any person, by the use of the mails or any means or instrumentality of interstate commerce or of any facility of any national securities exchange, to use or employ any act or practice in connection with the purchase or sale of any equity security in contravention of such rules or regulations as the Commission may adopt, consistent with the public interest, the protection of investors, and the maintenance of fair and orderly markets--
     
    1. to prescribe means reasonably designed to prevent manipulation of price levels of the equity securities market or a substantial segment thereof"
     
    Isn't that what Ackman did? He put forth a presentation that manipulated security price levels! He's violating Section 9, Article H of the Securities Act! Where is the SEC??
     
    Obviously, Ackman is in no way breaking the law, because the law is much more nuanced than taking some federal act, or legislation or advisory, and crudely finding a contravention of it, and saying that a criminal act has occurred. Rather, one ought to pay attention to court precedents, and to break the law one must be either violating these court precedents, or an activist FTC / SEC may bring an enforcement action in an attempt to establish a new precedent for something they believe ought to be illegal, and then a court will decide whether the FTC's case is justified. I don't think Ackman got close to demonstrating that HLF is violating the complex laws that have evolved over the years via court precedents and federal legislation and now regulate multi-level marketing.
     
    Separately, and this is a point that has yet to be brought up, I'm not sure the FTC wants to shut down MLMs, because we don't live in a country where the federal government polices how you can choose to fritter away your savings, which is the reason why there are no federal bans against payday lenders or casinos. Both are materially more harmful to society than MLMs.
     
    I'm not saying that HLF isn't violating the law, but I'm still waiting for someone to actually show me a coherent legal argument demonstrating that HLF is breaking a law. The Pershing Square presentation didn't do it, nor does www.factsaboutherbalife.com.
     
    Finally, if you're short or long HLF, the core of your thesis shouldn't rest on what the FTC does. The US is 20% of HLF's business, and shrinking. You take the entire US operations away and HLF is trading at 5x EBITDA instead of 4x. It's headline risk, not fundamental risk.
     
    So between (a) there likely being no actual legal case to be brought against HLF, (b) no motivation for a federal agency to shut down an MLM like HLF because in America, regulations governing how consumers can waste their money is typically not a federal issue but a state issue and (c) even if the FTC did bring an action, the US is too small a part of their business, I believe that the whole HLF-will-get-shut-down-by-the-government thesis makes for a weak short argument.
     
    FYI we're long HLF

    SubjectRE: zzz007 = that's not quite right
    Entry01/01/2013 06:06 AM
    Memberzzz007
    cnm,
     
    I disagree, but I am admittedly no expert on the philosophical ins and outs, and consider myself more of a pragmatist than a theorist.  I am not being facetious, so don't take that the wrong way.  I am confident that if we engage in a reasoned debate I will lose.
     
    Here's the way I look at it.  MLMs are selling the American Dream, just like thousands of other "opportunity" conduits.  Is it possible to become extremely rich as an MLM participant?  Absolutely.  Is the deck stacked against you?  Absolutely.  Is this any different than how many for-profit education companies sell their service, whereby they grossly exaggerate the outcomes you can expect when you get one of their degrees?  In my opinion, not really.  Taking it a step further, is it really different than what a state university, or Harvard University, is selling you when they market the "dream" of a college education?  I don't know.  Is it different than when an hourly worker hires on at McDonalds, and the manager tells them that the entry level job can lead to a store manager, and ultimately a regional manager, position with hard work and dedication?  These "opportunities" all lie along a continuum on the basis of the likelihood that the participant will, in fact, end up achieving their dream.  My sense is that you put MLMs at one end of the continuum, because the likelihood is very, very small that the dream will ever be realized, whereas other "opportunites" are acceptable because the likelihood of success is higher.  The way I look at it, right is right and wrong is wrong.  If education companies, or McDonalds, or whomever, is effectively using deceptive marketing to sell their "opportunity", then they're liars, just like the MLMs.
     
    Like I said, I don't expect you will agree with me, and that's OK.
     
    As far as alcohol goes, I use it as an example.  I understand it's legal, and I consider myself a libertarian.  To each his own, as long as it doesn't hurt others.  However, I do believe that alcohol is a massive public health issue and an insidious product.  I believe it is far, far more dangerous than many illegal drugs.  There are millions of people out there who can't control their intake, and who have ruined their lives as a result.  My point was that, globally, alcohol has ruined multiples of the number of lives that have been ruined by MLMs.

    SubjectRE: So then what is okay?
    Entry01/02/2013 12:09 PM
    Memberzzz007
    I think it's important to recognize that a "pyramid" is in no way definitionally necessarily "illegal".  The FTC clearly defines what constitutes an "illegal pyramid" structure, but there are also "legal" pyramid structures.  In fact, virtually every company of any size in the entire world has a pyramid-shaped organizational structure, since each employee at a higher level in the organization typically has more than 1 direct report and, as such, the organization resembles a pyramid as each successivly higher level in the organization has fewer employees than the level directly beneath it.  Economic spoils in this sort of system are also pyramid-shaped, as each higher level in the organization carves off its piece of the profitability that is effectively created by the work of the people on the lower levels.  To reiterate an earlier post in this thread, looked at this way, the entire capitalist system is effectively a massive pyramid organization.  This is a large part of what drives income inequality, which as we all know has increased materially over the last few decades.  Is this fair?  That's another conversation.
     
    My argument is that MLMs create less aggregate societal misery (or if you want to look at it from an economic standpoint, create less aggregate wealth transfer up the pyramid) than many other non-MLM businesses such as spirits, tobacco, or defense.  Most of the MLMs we're talking about transfer wealth up the pyramid, and that's about it.  The people at the bottom are left worse off because they're poorer.  Spirits, tobacco, and defense companies, however, not only transfer wealth up the pyramid, but also kill the people at the bottom.  In my world, that's worse.  That's why I find it hypocritical that somebody would be so anti-MLM, but be more than willing to invest in these other businesses.  More broadly speaking, I generally find moral arguments from money managers to ring hollow since I don't believe that we are in a business that does a whole lot to enhance the common good.  Yes, I understand the arguments about making aggregate capital allocation more efficient, as well as increasing wealth for not only rich LPs/investors, but for the pension funds that manage retirement incomes for widows and orphans.  That said, though, lets be fair.  We all do this to make money.  If you want to enhance the common good, you should be a schoolteacher, a doctor, or somebody who is installing clean water systems in sub-Saharan Africa.  I believe that we all make capital allocation decision every day that a theologian could legitimately question.
     
    You clearly don't agree with this, so I think we have to agree to disagree.  Contract murder and slavery are clearly illegal, so morals aside I believe it would be foolish to make a bet on them.  MLM structures are not necessarily illegal.  They can be, and if they are, then your argument makes more sense to me. Lets be completely clear, though.  Ackman is not raising any real new issues.  The "MLMs are illegal" argument rears its head every few years and gets shot down.  Maybe this time will be different, I don't know.  The fear of catastrophic risk is omnipresent, though, which is why there are typically multiple MLM businesses generating huge ROICs and massive cash flows in the public market trading at single digit multiples. 
     
    Cuyler believes that an MLM business presents real business risk for a portfolio manager.  I'm not so certain.  I suppose it depends upon your LP base.  Numerous public MLM businesses were incubated by private equity managers, so there are clearly plenty of LPs out there who are comfortable with these sorts of businesses.
     
    I just realized that I'm sitting here writing stuff about MLMs, despite the fact that I'm neither long nor short any of them and have no intention of getting involved.  So I guess the joke's on me.  Kind of fun watching from the sidelines regardless.

    SubjectRE: RE: RE: RE: RE: RE: RE: So then what is okay?
    Entry01/02/2013 03:21 PM
    Memberzzz007
    If you buy shares in a private prison operator, you're arguably buying into a government-sanctioned contract murder organization to the extent that operator is doing business in a state with death row facilities.  And no, I don't think they get a pass just because some government doctor actually pushes the button.  Given that private prison operators have been posted a number of times on VIC, I'm guessing that there are indeed some investors here who are willing to invest in contract murder organizations.
     

    SubjectRE: RE: RE: RE: So then what is okay?
    Entry01/02/2013 05:21 PM
    Memberlys615
    roark304 -- it's only Jan 2 and I'm ready to call this the best VIC post of 2013, maybe ever.  Awesome.

    SubjectRE: Gilder Gagnon Howe
    Entry01/28/2013 02:48 PM
    Memberele2996
    They are very successful money managers and have made fortunes for themselves and their clients over many decades. Richard Gilder and Lew Lehrman have given away a fortune to many institutions such as The Museum Of Natural History, Yale University and many others. Check him out at Wikipedia.

    SubjectRE: BTH no risk of Visalus bankrupting the company
    Entry01/31/2013 01:59 PM
    Memberconway968
    Yeah, hard to know what people are thinking.  It stretches my imagination to think that Visalus would be shut down, let alone the corporate veil pierced to go after BTH.  Visalus is among the most customer-centric MLMs I have ever seen.  If you were to rank order MLMs by legal risk / sketchiness, there are literally a thousand companies that would sit between Fortune Tech and Visalus.  The FTC took 3 years to investigate Fortune Tech.  The math just doesn't add up. 

    SubjectPartylite
    Entry01/31/2013 03:00 PM
    Memberscott265
    Devo,
     
    You cite  Partylite being worth at least $5-6/share.  How do you get there in light of the dramatic fall off in profitablity over the last several years. Is it based on some sales multiple or a series of cost cuts that lead to profitablity?
     
    Thanks.
     
     

    SubjectRE: agreement
    Entry01/31/2013 03:51 PM
    Memberconway968
    Yes, there are actually two potentially confusing clauses, which is why I suspected that it may not be understood by the market.  The two clauses are (bolded):
     
    The shares of the Series A and Series B Redeemable Convertible Preferred Stock (the “Preferred Shares”) are required to be redeemed on December 31, 2017, which date may be extended with the consent of the holders of a majority of the voting power of the Preferred Stock (the “Redemption Date”), for a total cash consideration of $147,532,215, unless prior to such date ViSalus has made an initial public offering of its shares of common stock at a price that indicates a valuation of ViSalus of $800,000,000 or more, in which event the Preferred Shares will automatically convert into shares of common stock of ViSalus on a one-to-one basis. The threshold valuation of $800,000,000 or more is an aspirational goal and should not be considered the valuation of ViSalus at the date hereof or to predict ViSalus' valuation at any time in the future.

    Blyth has guaranteed the performance by ViSalus of its redemption obligation.

    "Required to be redeemed" = required to be redeemed or else automatic conversion is triggered

    "Blyth has guaranteed the performance" = if Visalus does not follow these rules (for example, refuses to recognize the conversion rights), the founders can go after both Visalus and Blyth to recover damages.

    SubjectCVSL bid
    Entry10/28/2013 07:10 PM
    Memberkerrcap

    CVSL puts in bid to buy BTH, reportedly. 

    -------

     

    CVSL Inc., a direct-selling company run by Mary Kay Inc.’s former chairman, has offered to buy Blyth Inc. for about $268 million, two people with knowledge of the matter said.

    CVSL offered to pay $16.75 a share for Blyth, which sells candles, fragrances and ViSalus weight-loss products, said the people, who asked not to be identified because the information is private. The offer, which was extended last week in a letter to Blyth, could be made public by CVSL as soon as tomorrow, one of the people said.

    Blyth rose over 21 percent to close at $15.50 (BTH) today, giving it a market value of $248.2 million.

    CVSL is run by John Rochon, who was chairman of Mary Kay -- the cosmetics seller known for giving pink Cadillacs to top sales representatives -- until 2001. Last year he took over Computer Vision Systems Laboratories Corp. (CVSL) to create a new direct-selling company. The Plano, Texas-based company’s other acquisitions this year include Tomboy Tools Inc. and Agel Enterprises LLC, which makes nutritional and skin-care products.

    Jane F. Casey, Blyth’s vice president of investor relations, didn’t immediately return calls seeking comment on the offer. John Rochon Jr., chairman of CVSL’s investment committee, declined to comment.

    Blyth, based in Greenwich, Connecticut, reported revenue of $211.7 million for the second quarter, down from $309.5 million a year earlier, because of slumping sales of ViSalus, and the company cut its full-year earnings outlook in August. Ahead of today’s gains, the shares had fallen 18 percent this year.

    Rochon, 62, oversaw a sixfold increase in revenue at Mary Kay from the time he led its leveraged buyout in 1985 to about $3 billion when he left in 2001. As the founder and chairman of Dallas-based Richmont Holdings Inc., he also mounted takeover attempts for competitor Avon Products Inc. (AVP) in the late 1980s and early 1990s.


    SubjectAny updated thoughts?
    Entry01/27/2014 03:02 PM
    Memberncs590
    CVSL bid sounded serious and stock is trading for about half the amount of the bid.  Monster short interest still . . . would be interested if anyone has any insights here.

    SubjectRE: RE: Any updated thoughts?
    Entry01/28/2014 04:05 PM
    Memberncs590
    Thanks Bedrock.  I see CVSL has sold out:
     
    3:02 pm Blyth Industries: CVSL says it has liquidated its remaining stake in Blyth (BTH) : Following the rejection of CVSL's offer by Blyth management, CVSL has liquidated its Blyth position in full. Mr. Rochon noted that CVSL has essentially broken even financially on its Blyth investment.

    SubjectThrowing in the towel on Visalus
    Entry09/02/2014 08:22 PM
    Memberrjm59
    Looks like they are out of Visalus now, trading 80% of their ownership for the $143mm pref stock liability and keep a 10% equity interest.
     
    http://finance.yahoo.com/news/visalus-founders-agree-principle-acquire-225600722.html
     
    This seems like it has to be bottomed out now - the guarantee on the pref stock was a looming concern though it always seemed like they could just throw in the towel like they did here at any point prior to Dec 2017 which of course begs the question why did they do it early?
     
    Looks like they have to refi the $50mm debt in the next 6 months after this closes - why not just pay it off with the $90mm+ cash they have though?
    So 1/2 the market cap in cash, trading at <0.1x EV/Sales post ViSalus and not losing money... 
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