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September 01, 2011

Canaccord Summary

September 2011 – Monthly Summary: A Summer Swoon with Plenty of Puts and Takes

by Scott Van Winkle, CFA

CanaccordGenuity LogoThe direct selling sector has officially corrected on Wall Street (a correction is defined as a 10% decline in the share prices of the publically traded companies measured), but so has the broader market, so we see no reason to fret about the sector overall. However, investing in the direct selling sector has been almost as volatile of late as it was from October 2008 through mid-2009, when plunging foreign currencies and declining consumer spending sent shares tumbling across the board. The good news is that there has probably been more positive volatility than there has been negative volatility across the sector. There have been disparate share price performances, but we believe there have certainly been more higher ones than lower ones. Among the larger direct sellers (over $100 million in market capitalization and thus generally less volatile), some companies are faring exceptionally well, such as Herbalife, which is enjoying broad-based strength and yielding accelerated revenue and earnings growth, and Blythe, which appears to have captured lightning in a bottle with its ViSalus unit. Nu Skin Enterprises has enjoyed a strong stock performance, Nature’s Sunshine has been rediscovered and Tupperware has fared well on Wall Street until a recent share price correction. There are ample examples of success among the smaller companies on the publically traded list as well. Of course, we must also mention Pre-Paid Legal, which is no longer public after its acquisition by MidOcean Partners, but its shares performed very well prior to consummation of the acquisition.

Our suspicion is not that investors have broadly been searching for direct sellers but rather that, given there is a seemingly short list of consumer businesses posting strong growth in the current environment, the growth among several of the direct sellers is highly sought after and attracting investor interest. The broader investment community may also be recognizing the increased channel focus from private equity given the MidOcean acquisition of Pre-Paid Legal and the investment by Sequoia in Stella & Dot, which undoubtedly adds to investor interest. Nonetheless, while there have been some strong performances among the  publically traded stocks, public investor interest seems to simply be in line with historical averages.

We measure investor interest and demand for direct selling companies by comparing the valuation investors are paying for these stocks today vs. various periods in the past as well as vs. the comparable valuations of other consumer or retail sectors. Our direct selling group, comprised only of U.S. listed stocks with market capitalizations above $100 million to ensure the availability of analyst forecasts, is trading at 13x this year’s projected earnings (stock price divided by the consensus 2011 earnings per share forecast), or about in line with the historical average and not too discounted from the traditional consumer staples or retail sectors. While public investor interest may only be in line with historical trends, there is certainly increased interest among the private equity investors as mentioned.

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 provided investment banking services to Nu Skin Enterprises within the last 12 months. Canaccord Genuity has provided non-investment banking securities-related services to Herbalife and Nu Skin Enterprises in 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.