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December 20, 2011

Canaccord Summary

January 2012 – A Stock Prognosticator’s Year in Review

by Scott Van Winkle


Click here to order the Direct Selling News issue in which this article appeared.


Canaccord Genuity

As 2011 comes to a close and corporate boardrooms reflect upon the past year, there are some wildly varied perceptions of how Wall Street treated the direct selling sector over the past year. There are likely some varied perceptions of how the economy impacted individual businesses during 2011 as well. From our standpoint of monitoring the industry at a relatively high level, we are challenged to find consistencies among the U.S. direct selling trends. In the most basic terms, it seems as though the momentum continued for many of the channel’s participants. However, this doesn’t imply that the momentum was favorable for each company. For the direct selling enterprises enjoying a wave of distributor growth as the year began, it often continued and the reverse was often true for other players.

Beyond the United States, there is plenty of regional correlation among the larger direct sellers. There was generally robust growth in many Asian markets and strong performances within South America. We can also find some correlation among the world currency markets. However, our take is that a world economy that seems to be slowly moving along, rather than materially strengthening or weakening, is an environment where success can certainly be had. It just can’t be had by all market participants or in all geographical regions. On Wall Street, we call this a stock pickers market. In fact, 2011 was undoubtedly a stock pickers market in direct selling and a market where size had more of a correlation to performance than we typically encounter, at least among the U.S. based companies.

One product correlation that we can identify across the direct selling channel is that weight management is enjoying some favorable trends. Weight loss has a history of being fraught with short-term phenomena on Wall Street. Investors often see the weight loss stocks as fad stocks. However, this has not been the case in direct selling as Herbalife is among the most associated with weight management in direct selling and has proven its longevity, consistency and global market opportunity. Herbalife put in another good year with accelerated growth that has the shares up over 60% yet again during 2011. The share price performance has added roughly $2.5 billion to the company’s market capitalization and its total equity value is beginning to approach Avon’s as Avon’s shares have underperformed. Herbalife is essentially breaking ranks with even its best performing peers in that the company is reporting almost universal momentum in every geographical region, even within its most mature markets. Of late, only a strengthening U.S. dollar has trimmed profit growth expectations. The company’s strong volume growth, expanding margins, sales leader trends, emerging market successes and investments in its supply chain have been the key attributes building on its allure with investors.

While Herbalife may be the direct seller most associated with weight management, Blyth may be the stock most closely watched by industry executives. It isn’t about candles anymore, but rather the company’s ViSalus unit and its incredible momentum that has many in the industry talking. ViSalus’ 618% revenue growth during the Q3 ended Oct. 31, 2011 was much more than needed to offset declines in the Partylite segment and deliver both strong revenue and profit growth. While the results have been strong and apparent for over a year and the share price has nearly doubled since Jan. 1, 2011, institutional investors are just beginning to truly notice the growth and opportunity. With strong momentum and some favorable trends in the weight management segment of direct selling, ViSalus is undoubtedly a company to watch in 2012.

Looking across the stock performance for 2011, we’ll highlight a few of the other positive performances that stick out in the accompanying Stock Watch. First, there were a couple of share price recoveries in 2011 that deserve some mention. Natural Health Trends shares have recovered from a swoon begun in the latter half of 2009 and with a share price below $1 the magnitude of the percentage recovery is remarkable. Nature’s Sunshine Products has also seen a marked improvement in its share price that we attribute to a recovery as investors have recognized renewed growth at Synergy Worldwide and profitability has jumped. The company appears on a more favorable track with investors than it has enjoyed in many years.

Nu Skin Enterprises is another of the most robust stock price performers in 2011 thus far. The company shook off pressure following the natural disasters in its largest market of Japan earlier in the year to post improved growth and strengthening leading indicators as the year progressed. Nu Skin undoubtedly reaped as much benefit from the strong Japanese Yen as any direct seller, but is really enjoying the benefits of an impressive new product launch at its October distributor convention. The $100 million of preorders for its most recent Age Loc product launches have set the tone for continued new product momentum that has helped deliver a fifth consecutive year of over 15% earnings growth. Investors are keenly focused on momentum in the direct selling industry and Nu Skin’s momentum, along with that of Herbalife, is a major focus.

Tupperware, which continues to deliver against investor expectations for growth and cash flow performance, has extended into a multi-year trend of general outperformance. The strong emerging market growth has expanded upon the rising investor confidence over the last couple of years. Despite the stock’s strength this year, it is still well off its most recent highs from this past summer. Tupperware, along with several of the international direct sellers, is facing currency challenges that have contributed to a fall-off from many of the late summer highs made in the sector.

To wrap up the bell-weather stocks in the direct selling industry, Avon’s over 40% decline year-to-date can be attributed to a host of challenges, some of which aren’t directly related to the fundamental performance of the business. A catalyst appears to be sorely needed to regain investor confidence with Avon. After a sharp correction in the shares this year, Avon is no longer the stock against which all other direct sellers wish to compare their valuations. Avon’s shares are now among the more cautiously valued relative to earnings forecasts among the entire sector.

In 2012, the key question for the global direct selling industry may continue to revolve around tepid global growth, international growth opportunities in promising emerging markets and a European financial crisis that seems to rise and fall almost daily.

Good sales to all in 2012!


Scott Van WinkleScott Van Winkle is a Managing Director of Equity Research at Canaccord Genuity, the global capital markets division of Canaccord Financial. Canaccord Genuity offers institutional and corporate clients idea-driven investment banking, research, sales and trading services from 16 offices worldwide. Van Winkle, based in Boston, has followed the direct selling channel since 1997.


Disclaimer: Canaccord Genuity has published research recommendations on Herbalife, Medifast, Nu Skin Enterprises and USANA Health Sciences and makes a market in shares of Herbalife, Medifast, Nu Skin Enterprises and USANA Health Sciences. Canaccord Genuity has provided non-investment banking securities-related services to Herbalife, Nu Skin Enterprises and Reliv International during the last 12 months. Past performance is not indicative of future results and these comments are not a recommendation to buy or sell the specific securities discussed.