Billionaire Bill Ackman created a frenzy in the multi level marketing industry with his attack on Herbalife (HLF) earlier this year. It is an interesting business model indeed, but the fact remains that Herbalife and many other direct selling companies have fared well for shareholders. Once such company, with proven historical growth and significant future potential, is Nu Skin Enterprises (NUS).
Nu Skin utilizes person-to-person marketing to market and sell products to end users, and this company has been very successful under the direct selling channels. It has grown tremendously over the years and has provided significant returns to shareholders along the way. Even hovering near 52 week highs, the company is still attractive on a fundamental basis. Further, its tremendous growth with no signs of slowing indicates this is still a company on the rise. Nu Skin currently boasts a global sales network of 950,000 active sellers in 53 countries.
It is not only growing revenues overall, but every geographic sales region has posted annual revenue increases over the last five years. A closer look at the other numbers in addition to revenues reveals an even better picture.
Revenue Growth
Since 2003, the company has grown revenues from $985 million to over $2.1 billion in 2012 at an average annual growth rate of 9.5%. Even more impressive is the fact the company showed no slowdown between 2008 and 2010 when many consumer products companies were struggling to keep sales up as the U.S. entered into a recession and world growth slowed. Over that time period, Nu Skin revenues increased 23.2% in two years from $1.25 billion in 2008 to $1.54 billion in 2010. Looking at the charts below paints a detailed historical picture of NUS vs. Consumer Personal Products in general and illustrates the company's ongoing revenue growth.
(click to enlarge)
The top line chart shows the pric! e performance of NUS vs. Personal products from 2008 through early 2013. It looks promising, but without looking at the two lower indicators doesn't mean as much. The very bottom line in orange shows NUS revenue growth and the brown line above it is the historical P/E ratio. The growing revenues and stable P/E over the last five years provide a strong basis for the growing stock price vs. the industry averages.
EPS and Profit Margin Growth
As revenues have increased, the company has also managed to control expenses, leading to growth in earnings per share and margins. Not only has the company been able to maintain strong gross margins of 80% plus, but it has also grown its net profit margin from 5.2% in 2008 to more than 10% in 2012. Steady profit margins are good for long term performance as long as a company can maintain revenues. Growing net margins, along with growing revenues, are a home run.
Earnings per share have grown 363% from $0.79 in 2003 to $3.66 in 2012. Just in the last five years since 2008, average annual earnings growth has been in excess of 38.22%.
With this growth, the company has also been able to grow its dividend from $0.28 per share in 2003 to $0.80 per share in 2012. The average annual dividend growth has exceeded 12% since 2003 and averaged more than 20% annually over the last three years. While all of these factors are important in illustrating the growth rate and strength of Nu Skin, nothing is as telling as the free cash flow numbers.
Free Cash Flow Growth
While free cash flow is always an important factor to a company's health, in the case of Nu Skin it is of particular importance in gauging the company's ability to continue to pay and grow dividends, as well as pursue growth opportunities across its global markets. This will allow us to better! determin! e an intrinsic value for the company if earnings and dividends can be expected to grow over time, and free cash flow is a good indicator of a company's ability to do so. Nu Skin has not only posted healthy free cash flows over the years, but it has grown free cash flow at an annual average of 25% since 2008.
As Nu Skin continues to grow revenues across its global market segments, it should be in good position to provide significant returns to shareholders through dividends and dividend growth as cash flows continue to grow.
Intrinsic Value
It is clear that Nu Skin is a good company with healthy growth and future potential, but that alone doesn't tell us whether it is a good value at today's stock price. As Warren Buffett has stated, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Nu Skin appears to be a wonderful company, but is it a fair price?
It appears to be trading at a slight discount to its market value based on historical trading standards, even being near all-time highs. Using the company's five year average P/E of 15 as a guide for an intrinsic value calculation, along with the five year average dividend payout ratio of 29%, and an expected five year revenue growth rate of 30% (well below the past 5 year average of nearly 40%), we find an intrinsic value of $70.74 per share, a 12% discount from the current market price of $62.29.
Risks
As with any equity investment, risks must be weighed carefully. Nu Skin faces many of the same risks as any other publicly traded company but is also faces a number of risks stemming from its international sales as well as its product lines.
The first significant risk is that of fluctuation currency exchange rates. In 2012, the company derived 89% of its sales from outside the United States, with the largest portion coming from Japan.
23% of the co! mpany's t! otal revenue came from Japan in 2012. While foreign currency fluctuations negatively impacted revenue by less than 1% in 2012, major moves in currency exchange rates could create a greater impact in future years. With a large portion of revenues coming from Japan, Nu Skin uses debt to hedge against currency fluctuations.
The company has a significant amount of its outstanding debt denominated in Japanese Yen, so if revenues from Japan decline as a result of unfavorable currency exchange rates, they will be offset by the debt.
To illustrate, at year end 2012 the company had 4.1 billion Yen debt which equated to $46.8 million U.S. dollars. With strength in the U.S. dollar against the Japanese Yen in the first half of 2013, the same 4.1 billion Yen debt is now equal to only $41.9 million U.S. dollars.
So while the rising dollar may negatively impact dollar denominated revenue from Japan, the corresponding decrease in debt helps to offset long term issues stemming from currency risks.
The second risk Nu Skin faces deals with FDA regulations. Because of its business lines in the nutritional supplement industry, the company is required follow FDA regulations on Good Manufacturing Practices and Adverse Event Reporting requirements. Noncompliance in these areas could result in penalties or actions impacting the company's ability to sell certain products.
Cash is King
Any company that has demonstrated the type of growth that Nu Skin has deserves at least a glance. But a company that has posted growing revenues, increasing profit margins, dividend growth, and free cash flow growth demands a more thorough analysis. The free cash flow produced is perhaps the most compelling. By all accounts, Nu Skin appears to be a healthy and growing company with significant future potential, and there is still upside from here even at the current price. It may not be a wonderful company at a wonderful price, but it is a wonderful company at a great price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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