Thursday, February 3, 2011

Blyth Inc: Flaming Value?

Blyth (BTH) sells an extensive collection of accessories including candles and lotions. The company trades with a P/E of just 7, despite a ttm return-on-equity of almost 15% and despite having more cash than it does debt.

Blyth derives the majority of its sales in an unusual way: at home parties. The company has about 20,000 active US sales "consultants" who organize parties for their friends/acquaintances and make a commission of sales they generate at these parties. For those unfamiliar with this selling model, it may appear to be fad-ish or pyramid-like, but the company has been successful/profitable in this way for over a decade as a public company.

But while the company's P/E ratio is low and its return-on-equity is impressive, there are a couple of noteworthy items that may interest the value investor. For one thing, sales have been declining long before the recession hit. The company is facing competition for similar products from regular retailers and, of course, online channels (where Blyth competes as well). Therefore, while some of Blyth's sales declines are no doubt cyclical, there is likely also a secular component to the declines as well. The good news is that the company has been cutting expenses quickly as well; recently, its profits have risen despite lower sales levels, suggesting the company has had some success with some of its productivity-growth initiatives.

Second, the company's earnings are artificially high over the last twelve months as a result of a large tax benefit. In the last holiday quarter, Blyth paid taxes of just $2.5 million on earnings before taxes of $34 million. Ordinarily, Uncle Sam would not put up with such a low payment for long. However, in Blyth's case, the silver lining is that the company has tens of millions of dollars in losses that it can carry forward for tax purposes, but these are jurisdiction-specific and not a sure thing by any means.

Blyth is cheap and may offer investors both potential upside and decent downside protection. However, potential investors should be sure to have a strong grasp of the company's true earnings power before jumping in.

Disclosure: No Position

1 comment:

Dustin said...

The home-party distribution model is not particularly in favor with many investors. However, one might imagine that with a recent downturn, job growth stagnant--indeed, today's numbers indicate that many folks are quitting their search for a job altogether--, and the need to derive income for many 2-income families struggling to maintain their homes; that many more sales personnel would be attracted to this market. The start up costs aren't terribly high with this model, and would give people a sense of self-accomplishment,even if it wears off quickly. The question becomes, "Where is the saturation level?" I know, from watching my wife attend several of these parties, that there are only so many parties you can attend per year before the format's appeal wears off.

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