Blyth BTH

I'm sure many people heard about Bill Ackman's short thesis on HLF. If you haven't, do yourself a favor and check it out. It was phenomenal. I was mesmerized for the entire presentation and what was great was that all his research could have been accomplished by anyone will to work.

Time will tell if he is correct. Ackman, for all his glory, bets big and has failed even bigger in the past. I have zero intention of shorting HLF but I'm enjoying the discussion over the investment. I've examined MLM companies in the past and thought I'd write out a few quick thoughts on Blyth (BTH).

Background

I first discovered the MLM side of BTH at Roddy Boyd's newest webpage Southern Investigative Reporting Foundation(SIRF). I've always respected Boyd and thought his book on AIG was great.

Anyways, SIRF discussed the incredible growth of BTH, a story I won't rehash. There's plenty of internal dealings between ViSalus (the MLM group) and BTH. ViSalus also has it's fair share of odd insider activities. (Their white papers are literally about hearing loss! There's nothing to do with weight loss!) What I think makes BTH interesting is potential overlaps between BTH and HLF stories.

Similarities

1. Incentive to Recruit: On slides 246 and 247 of Ackman's presentation he shows the incentives that exist for promoters at Avon and HLF. The point that I thought was most informative is that Avon only pays you for three levels in a descending manner. Thus, there is no incentive to recruit and recruit.

Some MLMs do not have those limits, thus the incentive is to recruit and not sell. The compensation for ViSalus is designed to recruit very aggressively. If you don't believe me, check out their Summary.

2. Pop and Drop: Ackman shows several countries where HLF entered, saturated the market and dropped. Is ViSalus on the way there?

It is interesting to note that Q3 2012 had 110,000 promoters, down by 3,000 from the second quarter of 2012. The sustainability of the business could be shown over the next quarter or two depending on how many more promoters sign up or leave. This is simply something to watch.

ViSalus is preparing for international expansion in 2013. This could set them up for continued expansion and revenue growth. This too could be a similarity to HLF. 

3. Some similar faces at the top: The Chief Technology Officer and President of Visalus both hail from Herbalife.

Finally, some of the top distributors currently at ViSalus have worked for some....well, not so good MLM companies. I could list about a dozen people/companies that received nice cash bonuses to switch to or from Monavie, Limu, Momentus, ViSalus etc. It's seems to be a carousel.

So with those quick notes I think it's worth mentioning the other part of Blyth, the actual business.

The Decaying Core Business

Boyd hits on this in his article but I thought it was worth expanding. The core business is deteriorating and the only thing keeping BTH afloat is growth from ViSalus. The evidence is pretty clear in their filings.

Looking at last quarter we see that total sales were $269.8M. ViSalus contributed $169.9M (63%) of that. In 2011 BTH reported total revenue of $796.6M and ViSalus contributed $230.2M, meaning core BTH revenue was $566.4M. In the past nine months BTH parent revenue was $848.5M and ViSalus had $497M of revenue putting core revenue at $351.5.

Annualized this 9 month revenue figure works out to 2012 revenue of $468.6M, a one year decline of $97.8M or 17%. In 2009 BTH revenue figures came in at $913M, ViSalus represented only 2% of total sales at that point(Page 4).

So what is the Core Business worth?

To arrive at an estimation I looked back to 2011. My references were pg F-4 of ViSalus S-1A filed 09/17/12 and page 42 of BTH's 2011 10K.

I assumed that everything was consolidated (except for my calculated core profit #) because their ownership was over 57% for most of 2011 and over 71% during the end of 2011. As far as I understand everything up to operating profit is consolidated. My assumptions for interest and taxes should result in something more favorable towards BTH and thus a conservative (for bears) estimate of profit.

Core Revenue: $796.6-$230.186=$566.4M
Core Gross Profit:$473.99-$164.58M=$309.4M
Core SG&A: $424.32 - $129.35M= $294.97M
Core Operating Profit: $14.43M 
Core Interest Expense: $7.15 -$0.26M= $6.89M
Core Tax:$14.708-$9.87M= $4.83M
Core Profit: $2.71M


Even if we assume that sales and expenditures stay the same (extremely unlikely), equity for the core business isn't worth much besides residual asset value. With a current market cap around $258M (~16.6M shares outstanding after the recent buyback times $15.60/share) most of the value is being assigned to ViSalus.

Conclusion

I think that Ackman may have gotten a little ahead of himself here. He could end up correct, but to what degree he is right will dictate the success of this bet. With that said I think he makes some great points and his information is worthwhile.

I believe that ViSalus is similar to HLF and may see a pop and drop due to declining promoter enrollment, a trend that might be confirmed over the next quarter or two. This is not good for BTH due to the $229M payment in 2013(pg 11). This would wipe out all the cash on the balance sheet and leave BTH with a rapidly decaying business and an MLM arm. A significant cash crunch could occur if ViSalus doesn't continue to grow because BTH has ~$100M in bonds due in November 2013.

For now I will hold off and continue to research. Perhaps the best way to learn more is to make a visit to their Regional Event in NJ on the 19th. No position currently.