Is Mannatech Healthy For Your Portfolio?

| About: Mannatech, Incorporated (MTEX)
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As many Americans try to take better care of their bodies by adopting a healthy lifestyle and good eating habits, they’ll often look outside the realm of physician-prescribed mainstream medications for alternative, over-the-counter solutions. Hence, the rise in the demand for nutritional supplements of many varieties – vitamins, minerals, herbs, imported or domestic, natural or man-made. Some studies have estimated the market value at close to $5 billion in 2006, with expectations for it to grow by another billion dollars or so by 2011.

Enter Mannatech Inc. (NASDAQ:MTEX), a Coppell, Texas-based company founded by Sam Caster in 1993, shortly after a change in federal regulations made it more advantageous for companies to market a greater variety of dietary supplements. It became publicly traded in 1999, three years after introducing its headliner product, Ambrotose which the company says “supports the immune system.” Through an army of independent local distributors in a multi-level-marketing program, and direct sales through its website, Mannatech offers a line of products usually in packages selling from about $20 to well past $300. Most are nutritionals; there are a handful of skin-care items, and a few deal with weight loss.

The company founder and his wife, Linda, readily express their Christian beliefs, and she has written that Mannatech is a “Joseph” company, referring to the Biblical character who was on a divine mission. Supporters love Mannatech and tout the effectiveness of the company’s products in helping to stave off a variety of ills; detractors say they’re scamming customers with worthless products and false scientific support of the nutritionals’ benefits. Most of its supplements are glyconutrients, and Mannatech is best known for selling Ambrotose, which it calls “a glyconutritional dietary supplement ingredient consisting of a blend of monosaccharides, or sugar molecules.” The human body needs simple sugars, and while the majority of medical experts say the body will produce the sugars that it needs from a normal diet, Mannatech suggests that its products can enhance wellness by supplying those sugars.

According to the company’s website, wellness starts at the cell level:

Glycoscience is the broad term for the study of structure and function of sugars (glyco is the Greek word for sugar) in the body. These healthy sugars are the foundation of glyconutrients, ingredients found in Mannatech’s proprietary products created to help our individual cells communicate.

“I believe Mannatech has been entrusted with and has unlocked a group of technologies that is truly a better solution to global health,” Steve Lemme, the company’s senior vice president of sales and marketing, told the magazine Health & Personal Care in late 2006. “It’s time our culture begins to focus more on promoting health and wellness than in treating illness.”

At the end of 2006, Mannatech reported having 544,000 independent associates (who go out and sell the company’s products) and members (individual customers who mostly buy the products directly from the company for personal consumption), an 11% increase from the 490,000 reported at the end of 2005. Some of the claims made by its sales force of independent contractors apparently have exceeded the benefits claimed by Mannatech, according to a number of reports in the news media, which has led to at least three shareholder lawsuits.

Whether its products are good or bad, Mannatech has grown into a company with a market capitalization in excess of $400 million. The market cap had passed the half-billion-dollar mark until the share price tumbled a bit in the past year as the company began facing this wave of legal problems. Mannatech, described as a “global wellness solutions company,” falls into the same category as Herbalife and Nature’s Sunshine, which both sell more mainstream dietary supplements such as weight-control aids, vitamins and minerals. It has indeed become a global enterprise, with operations in North America; in Denmark, Germany and the United Kingdom in Europe; Japan, South Korea and Taiwan in Asia; and in Australia and New Zealand. Investors have noticed Mannatech. Recently, BusinessWeek, without comment on its products or legal problems, put Mannatech at 12th on its list of hot growth companies.

Last fall, the Forbes list of the best 200 small companies had Mannatech ranked fifth; however, it classified the company under “Food: Specialty/Candy.” As food supplements, the U.S. Food and Drug Administration does not have to approve the value of its products. In the first quarter of 2007, Mannatech saw sales rise nearly 6% to $104.8 million, helping give rise to a 16.6% increase in net income to $6.9 million. Earnings increased to $0.26 from $0.22 the year before. That followed on a 5.3% increase in net sales for all of 2006, to a company record $410.1 million.

The company said net income for 2006 grew to $32.4 million, a 13.1% increase from the prior year’s $28.6 million. Full-year diluted earnings per share grew 15.5% to $1.19. Last fall, the Texas Attorney General’s office said the company was under investigation for allegations of deceptive trade practices, for the way that it markets its products. Texas newspapers reported that the Consumer Protection and Public Health Division was investigating the company’s health claims, saying in a memo: “Mannatech has made unproven health claims about its products, such as the ability to cure or treat cancer and numerous other ailments.” Before that, three Nobel Prize-winning scientists reportedly filed a protest with the New York Attorney General’s office, complaining that Mannatech falsely linked their research to its products. Some of the company’s shareholders also are participating in a class-action lawsuit that was moved from New Mexico!
to Dallas, according to a Mannatech regulatory filing in March. The lawsuit, which combined three cases originally filed in 2005, claims that the company violated U.S. securities law by “artificially inflating the value of our common stock by knowingly allowing independent contractors to recklessly misrepresent the efficacy of our products.”

Shares of Mannatech have bounced around in the past year, and are currently trading around $14, or midway in a 52-week range of roughly $11-$20. It does pay a dividend, currently at $0.36, with a dividend yield of 2.32%. Sugar pills are often used as placebos to help determine the true effectiveness of the real product. True believers are going to say Mannatech sells supplements that work. The question for investors to ask: Does Mannatech have a prayer of a chance to survive its legal problems? With few analysts covering Mannatech – or admitting that they do – it’s difficult to figure out just what the professional money managers think.

On the May 7 conference call with investors, analyst Roger Lipton, of Lipton Financial Services, asked whether Mannatech might be taken private. Chief Financial Officer Steve Fenstermacher reassured the caller that the board includes three directors “who together control over 40% of the shares, and I believe they have (a) long-term view for the company. And it includes continuation (as a public entity).” Many consumers are sweet on Mannatech, but investing in a company that has so much legal baggage hanging over it can leave a small-cap investor with a sour taste.

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