Investing in MLM Companies in Crisis? Let’s discuss.

Recently, another Multi Level Marketing (MLM) Company is under attack. This time it is Nu Skin Enterprises Ticker Symbol (NUS). This lawsuit against Nuskin has also caused the stock prices of other MLM companies to fall. Stocks like USNA, HLF and AVP has been affected.

In this post, I want share a bit on the legality on the MLM companies as there are arguments on whether MLM is actually even legal. Here is an extract from my book, Winning the Money Game on the discussion on MLM versus Pyramid Scheme.

Illegal Pyramid Scheme?

Isn’t Network Marketing an illegal Pyramid Scheme? To answer this question, let me address two things here.

The first thing is the Pyramid Structure. Honestly, why do you have any issue with this shape anyway?

Screen Shot 2014-01-22 at 10.26.13 AM

Let’s take a look at this shape and let me ask you a question. Doesn’t your organisation adopt this shape too? Are there more CEOs than workers? Probably not. Almost every organisation adopts the pyramid structure (see chart on next page).

Screen Shot 2014-01-22 at 10.26.42 AM

What many people are unhappy about is the fact that the people on top of the pyramid earn all the money. But isn’t that the same in every organisation? Can a manager earn more than the CEO? Wouldn’t it become confusing? What is great about Network Marketing is that it allows you to start from the top and start building your tree. In most organisations, how many of you will become CEOs? Probably only one or two. But in Network Marketing, you instantly become the CEO of your own Network Marketing Company.

The second thing is, is Network Marketing an illegal scheme? This is what I used to tell my brother previously when he wanted to join a Network Marketing Company.

I am a business graduate and I scored As in Business Law. MLM is illegal! But wait, there are differences in a legitimate Network Marketing Business and an illegal pyramid scheme which I did not explain to him back then.

I was a victim of a pyramid scheme twice and thus, I fully understand the difference. Here’s the difference:

  1. A pyramid scheme earns mainly through recruitment fees. Butfor Network Marketing, the earnings come from sales of the product, which is the Value the company is providing for the customer. That is true business.
  2. Another characteristic of the pyramid scheme is that the products are non-consumable and therefore there is very little chance of getting any repeat sales. One example is trying to sell a magical rock to someone. One more characteristic of the pyramid scheme is that you have to purchase a huge inventory and hold these stocks yourself.

So, when you choose a Network Marketing Company, you’ve got to be careful and choose correctly. You do not want to go into an illegal scheme.

Legitimate Network Marketing Companies Versus Pyramid Scheme

Legitimate network marketing Companies Pyramid Schemes
1. The start-up fee for all ethical multi-level selling companies is generally low, primarily to cover training materials, sales aids or demonstration kits. No recruitment fees. Pyramid schemes often disguise high entry fees as part of the price charged for the required purchases of training, product inventory, etc. Pyramid schemes make virtually all their profits from recruiting.
Legitimate network marketing Companies Pyramid Schemes
2. Such companies sell a wide range of quality products to the general public.
The bulk of the sales are repeat sales from satisfied customers. This is only possible because these companies spend millions of dollars on research and development to develop quality products.
Pyramid schemes are frequently disguised to appear as legitimate direct selling companies. Such schemes are not interested
in marketing these products (which are of dubious value). Instead, money is made in typical pyramid fashion by recruiting new distributors who are being pushed to purchase large, high-cost inventories when they sign up.
3. Many companies have
a 100% money-back guarantee. Dissatisfied users (and there are a few) can exchange the products back for money or for an equivalent amount in other products.
Pyramid schemes will not buy back unsold inventories. Such schemes will collapse very quickly if there is this condition for re-purchase of goods.
4. These companies are interested in long-term business. In every country that they operate in, this criterion is important because the companies have an obligation to their distributors who are businessmen in their own rights. Pyramid schemes are get- rich-quick schemes. The nature of the pyramids, in which large numbers of people at the bottom of the pyramid pay money to a few people at the top, clearly explains why the scheme cannot sustain itself for long.
Legitimate network marketing Companies Pyramid Schemes
5. Recognition of achievement is based on effort. This means that
a distributor’s income commensurates with the efforts he / she puts into the business.
Leadership position can be purchased.
6. Established companies depend on selling quality products which offer value for money in order to establish a market. Pyramid schemes do not have products or have products that are way below the market value in relation to the high entry fees paid.
7. These companies build up networks of independent distributors to sell products in a legal manner. Promoters of a pyramid scheme engage in fraud, knowingly deceiving participants in the scheme. Pyramid schemes are illegal.
8. They have strict Rules of Conduct which, among other things, forbid their distributors from loading up on inventory. Participants in a pyramid scheme have no choice but to participate in inventory loading and pay high fees to participate.
9. Income is derived
from commissions for selling products and / or services.
Income is essentially derived from recruiting, not necessarily on the sale of products or services.
10. Fair marketing plan. Members who join later can be more successful than their sponsors. Unfair marketing plan. Members who join later can never be more successful than their sponsors.

 

So from my personal opinion, companies such as Nuskin, Herbal Life and Usana are legitimate Network Marketing Company.

And when i look at their finances, I am pretty impress really.

Lets take a look at the 10 years Net Income and EPS of NUS, HLF and USNA

NUSKIN

This is the records for Nuskin (NUS) source taken from

http://investing.money.msn.com/investments/financial-statements?symbol=NUS

 

Screen Shot 2014-01-22 at 10.30.07 AM

 

 

Herbal Life

This is the records for Herbal Life (HLF) source taken from

http://investing.money.msn.com/investments/financial-statements?symbol=HLFScreen Shot 2014-01-22 at 10.32.42 AM

 

USANA Health Science

This is the records for USANA  (USNA) source taken from

http://investing.money.msn.com/investments/financial-statements?symbol=USNA

Screen Shot 2014-01-22 at 10.33.16 AM

 

From once glance, all there companies have been growing sales, total net income and EPS consistently over 10 years. But my personal preference is USNA because of the fact that is has zero long term debts. I also note that in terms of revenue, USNA is way smaller than Nuksin and Herbal Life, this probably means that there is more space for USNA to grow.

And overall, as of writing this post, the PE ratios of the 3 companies are:

USNA – PE of 11.33

HLF – PE of 15.04

NUSKIN – PE of 15.83

So, given comparable performance from the 3 companies, USNA seems to me to be the most attractive price.

Disclosure: At the time of this publication, out of the companies discussed herein, I have switched  positions from HLF to  USNA.

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Cheers,
Mind Kinesis Research Team

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