Mannatech Facing Huge Headline Risk
By Seeking Alpha on January 16, 2015
* Dr. Ben Carson is a paid supporter of Mannatech.
* Dr. Carson’s presidential ambitions could bring the company back into the spotlight.
* Headline risk could cause a significant deterioration in sales.
Look up any given multi-level marketing company and you’re likely to find a checkered past of regulatory run in’s and pyramid scheme allegations. Mannatech (NASDAQ:MTEX) is no exception. However, as the multi-level marketing industry has received more attention over the past few years, Mannatech’s troubles have largely evaded media scrutiny. Until now. Multiple news sources have dug up some past dirt regarding the company and one of its paid supporters, Dr. Ben Carson. As we head into a messy republican primary that is essentially already getting started, Dr. Carson’s name should appear more and more, as he has expressed interest in running for the republican presidential nomination. As a high profile public figure under intense media scrutiny, his support for Mannatech will likely get the attention of the mainstream press. Media attention on Mannatech and its questionable business practices will likely have “the Herbalife effect” of scaring distributors away and crushing results. The next two years could be disastrous for Mannatech, and could even prove fatal.
Mannatech was founded in 1993 and sells various proprietary sugar pills (they are literally sugar extracts). Like most multi-level marketers, the products are less critical to the success of the business. Growth has historically been linked to the effectiveness of new recruiting.
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As the above chart shows, there is a direct correlation between the number of active associates and sales. 79% of the company’s sales come from the automatic monthly shipment of products to associates. 15% of sales are derived from the sale of starter packs. Starter packs range from $39-$499 and are required to become an associate. They generally contain business tools and product samples. According to the annual filings, associates are responsible for “substantially all of [the company’s] revenue.” If the company is unsuccessful in recruiting new associates, their revenues will be significantly impacted. At the end of Q3 2014, the company had 234,000 associates, down 2% yoy.
Dr. Ben Carson is a “world renowned brain surgeon.” He is also a paid endorser of Mannatech’s products and a paid speaker at various annual associate conventions. Dr. Carson’s relationship with the company dates back to 2004 and is as recent as 2014. His image and endorsements are prominently displayed on Mannatech’s website and he gave speeches at the companies annual associate conventions in 2011 and 2013. In March 2014 he recorded a video for the company that spoke to the health benefits of its products. That video is available here. In a 2004 Dallas Weekly article, speaking about Mannatech, Dr. Carson is quoted as saying “I was impressed that they did not make any wild medical claims.” In that article, he goes on to suggest that Mannatech products played a role in his recovery from cancer.
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Dr. Carson has expressed interest in running for the Republican nomination for the presidency of the United States. The field of potential candidates is packed with various high profile politicians and Dr. Carson faces contentious challengers willing to look deep into his past.
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A November 2013 Quinnipiac poll ranked Carson in third place behind Jeb Bush and Chris Christie. Polls from ABC and CNN showed a similar scenario. If Carson runs and stays in the race for any substantial length, it is exceedingly likely that his ties to Mannatech will come to light. Recently, the National Review did a story which noted Dr. Carson’s relationship with Mannatech. In his article, Jim Geraghty details many of the company’s unscrupulous product claims that have landed them in hot water in the past. As the Republican primary approaches, Mannatech will face an onslaught of headlines similar to those in the National Review. This will dramatically impact the company’s ability to maintain and grow their distributor base.
Why Media Attention is Bad for Mannatech
On June 1, 2007, ABC News did an investigative segment on Mannatech. The piece is a truly disturbing look into this company. ABC news followed a young girl with brain cancer who was convinced by a Mannatech associate that their products could cure her brain tumor. She elected not to have chemo suggested by her doctors and instead took the company’s main product, Ambrotose, to fight her cancer. The report went on to chronicle the systematic training of associates who are taught to target and deceive people who are sick, all to sell them Mannatech’s sugar pills.
The company responded to the ABC interview by defending their associates, products and business model. Then-CEO Sam Castar (who regulators later banned from having an affiliation with the company) claimed the ABC investigation was “biased” and “deliberately deceitful.” The company’s full response is available here. The company did not respond to my requests for comment on the ABC interview or their relationship with Dr. Carson.
On July 5 2007, the Republican Attorney General of Texas, Greg Abbott, filed a suit against Mannatech for violating various consumer protection laws. Among the chief complaints was that Mannatech associates routinely touted the products as “cures” to various medical conditions including: cancer, arthritis, paralysis, Down Syndrome, Cystic Fibrosis and HIV/AIDS. According to the AG, there was no scientific basis to support these claims. In 2009 the company paid $6 million to settle with the Texas AG. While the $6 million is a relatively small amount for a company with revenues, at the time, of $413 million, it did insurmountable damage to the brand. The company reported all time high revenue of $111.2 million in Q2 2007 (the quarter before the suit). The number of associates peaked in Q3 2007 (the quarter of the suit) at 575,000. Revenue and associate numbers have never recovered from the damage done by the media attention and the lawsuits in 2007. Sales are down 54% since the 2007 peak and the number of associates is down 59% since the 2007 peak.
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Investors should brace themselves for a significant downturn in the business if Dr. Carson continues with his ambitions to run for the presidency next year. There is no direct way to predict the impact on sales in the near term. If investors observe similar companies in similar positions, the results are not encouraging. Nu Skin’s (NYSE:NUS) sales have dropped 40% since the Chinese media began questioning the company’s business practices in early 2014. Herbalife’s (NYSE:HLF) sales have dropped from an average annual growth rate of 22% over the past 5 years, to 0% growth since a damaging ABC news story and the announcement of an FTC investigation.
With the primary essentially having already started, Mannatech’s past sins should start to come out in the media more prominently throughout 2015. Since the Texas AG and ABC news situations in 2007, sales have deteriorated at an average annual rate of 7.7% and recruits dropped an average of 8.4% each year. Applying those statistics to today’s business metrics, we see a disastrous drop. By 2016 revenue would drop to $136 million and the number of associates would be down to 195,000. $136 million of revenue translates to roughly $49 million of gross income (a 23% drop from 2013).
The stock is up 65% over the past year. Reverting back to Mannatech’s historical P/E multiple and factoring in the reduction in revenues, would imply a $15 price target. The price target is 47% below the stock’s current level and represents a significant short opportunity.
An onslaught of negative publicity is coming to Mannatech. Investors must be cautious of the very real and very likely slow down this could bring in recruiting trends over the next 2 years. Dr. Ben Carson’s political rivals will be quick to jump on his affiliation and endorsement of a pyramid company that has a history of suggesting its products cure cancer, HIV/AIDS and just about every serious illness imaginable. The media scrutiny will add to the already deteriorating results and drive this company into the ground. Given their questionable and often illegal practices, that would probably be a good thing for this country.
