CRAP::: ALERT!!!!!!!!!!!MTEX!!!!!!WARNING>>>ILLEGAL PYRAMID SCHEME investigated by Michigan!!!
By Jonathan Weil
Staff Reporter of The Wall Street Journal's Texas Journal
Mannatech proved during its initial public offering last week
that it is just as successful at selling its stock as it is at
selling dietary supplements.
In fact, the company used a similar marketing technique. Forgoing
a conventionally underwritten IPO because of a lack of interest
from institutional investors, the Coppell-based multilevel-marketing
company launched its 3.1 million-share offering by marketing directly
to its army of 226,000 "associates" -- independent contractors
who receive commissions for selling the company's products and
recruiting others to do the same.
The strategy had some success: By Feb. 17, the day after the
offering, shares had rocketed to an intraday high of $44.50 from
the offering price of $8 a share. But since then, the stock has
settled down and now trades at $15.125, giving it a market capitalization
of $366 million.
It isn't easy to pinpoint who ran up the shares, but analysts
and traders who watched the rise offer several explanations. Some
guess that day traders saw Mannatech's name, with its "tech" suffix,
and wrongly presumed it was another hot Internet company, bailing
out when they learned more about the firm. Others say the independent
contractors, most of whom work from their homes, continued to
bid up the shares in the after-market.
Whatever the reason for the runup, many market pros say this
is a stock to avoid.
Mannatech, which has been operating for five years, is in a
controversial business subject to intense regulatory scrutiny.
Shares of more-established, publicly traded competitors can be
bought at much cheaper valuations. And the company's growth rate
has been declining sharply in recent quarters, in part because
of the shrinking number of potential associates remaining in its
North American markets, the company notes in its prospectus.
What's more, about half the shares that Mannatech sold in the
offering came from company insiders -- unusual for an IPO and
a bearish sign to some analysts who view such sales as an early
attempt to cash in.
"I wouldn't touch this thing with a 10-foot pole at any price,"
says Damon Southward, an analyst in Burlingame, Calif., for Briefing.com,
a Web-based equities-research firm. "You just never know when
they're going to come out with some kind of news that sends it
down to a buck."
Mannatech's controller, Steven Fenstermacher, says such concerns
are overblown. He says the insider selling isn't alarming since
most of the 12 officers and directors who sold reduced their stakes
in the company by less than 10% (though some sold as much as 30%
of their shares). He says that the company is careful in adhering
to regulatory requirements.
Mr. Fenstermacher declines to comment on the stock's quick
ascent, its current valuation or any assertion that investors
should avoid it. He says the decision to go public without an
underwriter "was based on the level of support that was shown
by the associate group." The company used mass letters, faxes,
e-mails and Internet message boards to invite its associates to
purchase shares, and Mr. Fenstermacher says he believes they probably
accounted for the "vast majority" of buyers at the IPO.
The offering, which raised $12 million to finance expansion
into Australia and the U.K., was so successful that two days after
the IPO, Mannatech said it was weighing a separate public offering
for its Canadian salespeople.
But analysts say the unusual nature of the offering will present
difficulties for the stock down the road. The company marketed
the IPO during a road show in about 20 cities, and presentations
were attended predominantly by its sales force. The lack of an
underwriter makes it highly unlikely that any analysts will provide
research coverage for the stock. Without such coverage, demand among mainstream investors is
almost certain to suffer later on, says Steven Tuen, research
director for IPO Value Monitor in New York. "Until the company
can develop some kind of a track record as a publicly traded company,
I'd be wary," Mr. Tuen says.
The lack of an underwriter also meant there wasn't a third-party
evaluation of the offering price to determine a reasonable value
for the shares. As a result, according to the prospectus, the
$8 offering price was "arbitrarily determined," based largely
on the valuations of comparable publicly held companies. Without
the outside scrutiny of the company's fundamentals that an underwriter
would have done, analysts say, it's difficult to gauge the stock's
true worth.
That could explain why Mannatech's current valuation is out
of whack with those of its peer companies. After last week's mania,
Mannatech's stock fetches a premium at 2.3 times its sales for
the past four quarters and 35.3 times trailing earnings.
By comparison, leading multilevel-marketing firms trade at
much smaller ratios. Amway Asia Pacific, a sister company of Amway
of Ada, Mich., trades at a scant 0.8 times sales, and Nu Skin
Enterprises -- another direct-marketing, nutritional-supplement
company -- trades at two times sales, and each had higher per-share
revenue than Mannatech during the past four quarters. Additionally, Mannatech's top competitors in the nutritional-supplements
industry -- General Nutrition, Twinlab and Weider Nutrition International
-- all trade for less than one times sales. Weider trades for
28.1 times its trailing earnings, but the other two trade for
less than 11 times earnings.
Other risks are outlined in the company's prospectus. One striking
red flag: Mannatech warns that various government agencies could
bring enforcement actions against the company for violating laws
against illegal "pyramid or chain sales schemes." The company
already has had a run-in with the Michigan attorney general's
office, which accused the company of marketing an illegal pyramid
scheme. The company and the Michigan attorney general in 1997
signed a consent decree in which Mannatech admitted no wrongdoing
but agreed to more closely monitor its sales force.
Mr. Fenstermacher declines to comment on the Michigan action,
and company officials contend in the prospectus that they operate
strictly within the law. When asked about the probability of enforcement
actions, the controller says he believes there's a "low risk"
that such actions would be taken.
Another argument the bears use: Mannatech's revenue growth
has begun to slow. In the first nine months of 1998, revenue was
$122.9 million, up 11% from a year earlier. By contrast, 1997
revenue rose 74% from the previous year, and in each of the two
years before that, revenue grew more than 100%.
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