Mannatech Is Still Cheap
Published: Sep 26, 2018
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Mannatech Is Still Cheap

 

Summary

Actually still surprisingly cheap with a sales multiple of just 0.3, especially given a substantial dividend yield.

However, there is no growth and no profits and cash generation also looks in danger.

Unless the company can revive its fortunes the shares will have limited upside, but if they do manage to increase growth, the upside could be substantial.

Nearly five months ago we argued that the shares of Manatech (MTEX) a multi-level marketing nutritional supplement provider, were cheap.

It still is (although somewhat less so), but the sailing is far from smooth as the company is struggling to make any headway.

ChartMTEX Revenue (NYSE:TTM) data by YCharts

Revenue declined again the first two quarters of this year and the company produced a loss. Revenues declined by 5.3% to $45.13M even with a modicum of currency tailwinds. The company also produced a loss of 13 cents per share.

There are a number of ways the company is trying to revive growth

  • New incentive program
  • New products
  • China, Meitei e-commerce

New incentive program

In order to deal with the decline management introduced a new incentive program for its associates over a year ago (Q2CC):

We launched a new commission plan July 1, 2017, and the number of packs sold to and associate fees paid by new and continuing independent associates and preferred customers decreased 22.6% during the second quarter of 2018 compared to 23,779 as compared to 30,734 during the same period in 2017, as our associates consolidate their businesses to respond to this new commission plan. This consolidation also influences the total number of active associate positions held by individuals in our network, which was based on a 12-month trailing period ending June 30, 2018, and 2017, approximately 202,000 and 218,000, respectively.

This suggests that the decline in revenue was a result of associates still adjusting to the new incentive program, but this seems odd to us, the new incentive scheme came into effect over a year ago.

What is clear is that different problems seem to plague different parts of the world.

In Asia, sales only declined a little (1.6% on a constant currency basis) and this was caused by a 19.8% decline in the number of active independent associates and preferred customers. Revenues per active independent associate and preferred customer actually rose 23.6%, so those that stuck it out don't seem to need new incentives.

In EMEA, the reaction was exactly the opposite with a 20.2% increase in the number of active independent associates and preferred customers while revenues per active independent associate and preferred customer declined 21.6%. Overall sales were down more than 10% on a constant currency basis but EMEA is by far their smallest market.

In the Americas there was a 9.6% decline in revenue per active independent associate and preferred customers as well as a 1.8% decrease in the number of active independent associates and preferred customers.

Some additional information is warranted:

  • Most money is made by recruiting new people.
  • The incentive structure is complicated, some 18 different incentives applied according to one source (16 in the UK 2015 version).
  • Compensation and incentive cost are rising.
  • The number of

On the latter, from the earnings PR:

For the three months ended June 30, 2018, commissions as a percentage of net sales increased to 40.8% from 38.5% for the same period in 2017 due to the structure of the 2017 Associate Compensation Plan, which was implemented on July 1, 2017. Incentive costs for the three months ended June 30, 2018 increased by 37.9%, or $0.2 million, to $0.9 million, as compared to $0.7 million for the same period in 2017 due to new incentives in growth markets. For the three months ended June 30, 2018, incentives as a percentage of net sales increased to 2.0% from 1.4% for the same period in 2017.

And the number of independent associate and preferred customer positions

The number of new independent associate and preferred customer positions held by individuals in our network for the three months ended June 30, 2018 was approximately 21,400, as compared to 26,500 for the same period in 2017.

So it's difficult to argue the new incentive structure is a success, incentive payments are up, sales are down, although for different reasons in different parts of the world.

The only part of the world where declining sales per active associates and preferred customers wasn't a problem was in their largest market which is Asia. Perhaps they're using a different incentive plan there (they don't use an incentive plan in China where they are selling via an e-commerce website Meitei).

The biggest reason why sales are down seems to be the considerable decline in the number of independent associate and preferred customer positions. There might be a glimmer of hope (Q2CC):

we increased the number of new users to our existing Mannatech+ sales and recruiting app by 69% over Q1.

New products

Their main product is Ambrotose. We won't get into the health claims issues here (count us as supplement skeptics in general) but that's now renewed into Ambrotose LIFE. Ambrotose LIFE was launched in the US late May

It will be launched this month in Korea (which is their largest market, as it happens) with other markets to follow. A clinical trial is also underway.

A sample program for EMPACT+ (a 'triple treat' product providing energy, hydration and recovery) was launched in June to elite athletes.

China

Their e-commerce business (headquartered from Hong Kong) was launched in August 2016 to considerable fanfare, but references of performance have come few and far between. For instance, from Q1CC:

In Q1 we continue to experience a steady rise of sales from our cross-border e-commerce business in China, while we continue to invest in human infrastructure and e-commerce technologies to gain further market share in China.

Which is almost identical to that of Q2CC:

In Q2, we experienced a steady increase of sales from our business in Hong Kong and e-commerce activities in the Mainland China. We continue to invest in human and e-commerce technology infrastructure to further gain market share in the Greater China region.

There wasn't any info in the 10-Q either about China sales. This might have looked promising once, but this sort of cut and paste references (and the increasing trade spat as unhelpful background music) has taken the luster out of it.

Margins

ChartMTEX Gross Profit Margin (Quarterly) data by YCharts

Declining sales are cutting into operating margins even if gross margins keep up rather well. Operating cost were actually up in dollar terms driven by 'other operating cost' (Q2CC):

other operating costs increased by $1.2 million or 18.3% to $7.9 million as compared to $6.7 million.. The increase in operating costs was primarily due to a $0.5 million increase in travel and entertainment, a $0.4 million increase in office expenses, partially due to the nonrecurring office expenses we incurred with the corporate office move and a $0.3 million increase in other miscellaneous operating expenses.

The company didn't provide any guidance, which is somewhat understandable given the nature of their selling process.

Cash

ChartMTEX Cash from Operations (TTM) data by YCharts

The good news is that the company still produces positive free cash flow, albeit we suspect that this turned negative in Q2 as the total for the first six months is just $1.6M, per the Q2 10-Q.

The company still had $28.8M in cash on its books, but this was down from $37.7M at the end of December last year as they are throwing a bit of a party for shareholders.

ChartMTEX Dividend Yield (NYSE:TTM) data by YCharts

The dividend is also four-folding:

  • Q1: cash dividend of $0.125 per share
  • Q2: cash dividend of $0.50 per share

The share count has gone down despite the considerable stock based compensation:

Chart

This is the result of a Dutch auction to retire 11.6% of outstanding shares completed June 20 (PR):

In accordance with the terms and conditions of the tender offer, the Company accepted for payment a total of 316,659 common shares of the Company at a cash purchase price of $21.00 per share, for a total cash cost of approximately $6.6 million, excluding fees and expenses relating to the tender offer. These common shares represented approximately 11.6%

Then on top of that the company also engaged in a further buyback program after the close of Q2 (PR):

Board of Directors has authorized the company to begin the repurchase of up to $0.5 million of the company's outstanding common shares from time to time in the open market pursuant to the company's existing share repurchase program. As of July 31, 2018, the company had approximately 2.4 million shares outstanding.

Valuation

Is the company still as cheap as we argued half a year ago? Well..

ChartMTEX EV to EBITDA (TTM) data by YCharts

Not quite as cheap as earlier in the year when we simply couldn't believe the sales multiple was real.

Conclusion

The shares are still cheap. The company pays a substantial dividend and is buying back a lot of shares. Yet it's hard to get enthusiastic as the company hasn't found a formula for reviving growth.

The new incentive structure hasn't done anything, as far as we can make out. Sales in China aren't trumpeted so little progress is made there. It's too early to tell if the new products will make a material difference and operational leverage is working in reverse.

So we don't see all that much upside for the shares, despite their pitiful valuation. Keep an eye on this though, as any success to revive its fortunes even a bit will provide a lot of upside.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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