SHELLY GARCIA Staff Reporter Timing is everything. Just ask Natrol Inc. In July, the Chatsworth-based manufacturer of nutritional supplements sold a 25 percent equity stake to the public through an initial public offering. The overall market was hot, and the offering went out without a hitch, at $15 a share. Proceeds from the sale were $48 million, just short of the $50 million expected, and the shares jumped in the days immediately following the offering, quickly reaching $17. Then the bottom fell out. By August, less than a month after the offering, the price had fallen to $10.87 and by early October, it had sunk to $6.62, a 55 percent decline from the initial price. What happened to Natrol, a Chatsworth-based manufacturer of nutritional supplements, is similar to what has happened to many other companies that issued their IPOs just as Wall Street went into a tailspin. Natrol delivered sales and earnings that met analysts’ expectations, it reported no news that would negatively impact its operating performance, and its industry is growing. Nonetheless, weakness in the overall stock market led to Natrol’s share price getting hammered. “In the IPO industry, psychology is very important,” said Tom Taulli, a market analyst with IPO Monitor, which supplies online information on IPOs. “Logic isn’t always important.” Although high-tech companies like Internet auctioneer eBay have seen their stock prices soar since issuing IPOs in recent months, more traditional businesses have seen their stocks plummet, in some cases far steeper than Natrol’s dive. The market downturn was severe enough to cause companies like Korn/Ferry International and Skechers USA to scrap their IPO plans, at least temporarily. But when Natrol issued its offering, the company had no idea that a downturn was just around the corner. Natrol, a 17-year-old company, began meeting with underwriters 18 months ago. The nutritional supplement industry, a fragmented patchwork of small players, was beginning to consolidate, and Natrol did not want to be left behind. “We would much rather be a consolidator than a consolidatee,” said Dennis Jolicoeur, Natrol’s chief financial officer. “Being public is one way of signaling that you’d rather be a consolidator.” Like with many IPO companies, the fortunes of Natrol are closely aligned with those of its senior managers. Natrol’s chief executive, Elliott Balbert, and other senior executives own a combined equity stake in excess of 50 percent. TA Associates Inc., a Boston-based investment firm, owns the other 25 percent that is not publicly traded. In recent weeks, Natrol’s stock has rebounded from its early-October nadir, trading late last week at $11.56 a share. But even at the higher levels, analysts say, it is especially difficult to attract investors when a company’s share price falls more than 15 percent below its offering price. “Shareholders get mad,” said Taulli. “They may become afraid to invest in the company.” Such fear, if it exists, might not be warranted based on operating results. Natrol’s third-quarter earnings, released just weeks ago, exceeded analysts’ expectations. The company reported net income of $2.5 million (20 cents per diluted share) for the quarter ended Sept. 30, nearly double its year-earlier earnings of $1.3 million (13 cents a share). Revenues rose to $19.5 million in the quarter, up from $11.3 million for the like period last year. Analysts said the performance suggests Natrol’s share price will eventually rebound. “You have to look at the two things (earnings and stock performance) separately,” said Yudi Bahl, a research analyst with Piper Jaffray Inc., an investment firm in Minneapolis. “Has the company delivered on what they said on their road show? The answer is yes.” Natrol executives say there is little downside risk in their company’s stock. In spite of its decline, Natrol’s stock offering accomplished its intended purpose. The company raised $48 million, and it has already made its first acquisition with the financing. In October, Natrol acquired Laci Le Beau Corp., a Fresno-based maker of herbal and diet teas. That acquisition is the first step in a strategy to acquire related businesses designed to help Natrol become a market leader in the herbal and nutritional supplement industry. The company markets about 300 different supplements, from multiple vitamins to herbs like St. John’s Wort, but it needs to branch out into other offerings such as sports nutrition products to reach its goal. “What we’re really looking for is either product diversification or channel diversification,” said Jolicoeur. Natrol executives plan to continue with their acquisition strategy, but they concede that the languishing stock price is a disappointment. “It is frustrating,” said Jolicoeur. “Like all people, we have a lot of pride.”
