Nu Skin Stock Is Undervalued But Risky

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Nu Skin Enterprises, Inc. (NUS)
L&F Capital Management

Long/short equity, value, investment advisor, hedge fund manager
L&F Capital


(5,587 followers)

Summary

Nu Skin is a MLM company that sells personal care and nutrition products.

As an MLM company, NUS stock is no stranger to volatility.

This volatility is accounted for in the presently discounted valuation supporting NUS stock.

NUS stock's discounted valuation will persist until China regulatory headwinds clear up and the long-term profit growth trajectory gains visibility.

Nu Skin Enterprises (NUS) is a personal care and nutrition multi-level marketing (or MLM) company which has been on a roller coaster ride over the past decade. Ten years ago, NUS was a $15 stock. Over the following decade, NUS stock rallied to $60, dropped to $40, skyrocketed to $140, plunged to $40, rebounded to $60, sold off to $30, soared to $90, and has most recently slid to $50.

Needless to say, NUS stock is no stranger to volatility. That stock price volatility is a byproduct of the operational volatility that is inherent to a MLM company with a global presence and significant exposure to legal and regulatory headwinds. As such, NUS stock's volatility comes with the territory of being an MLM company. This volatility will naturally persist, and so long as it does, NUS stock will remain a high-risk investment.

At current levels, we believe that NUS stock is undervalued relative to its long term growth potential. But, we also understand that this undervaluation is a byproduct of operational volatility which projects to persist for the foreseeable future. As such, we think the best way to look at NUS stock is as a stock that is cheap for reason.

Could it rally from here? Absolutely. Will it? Tough to say. For these reasons, we think this stock is only for those with a healthy appetite for risk and volatility.

 

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Nu Skin Enterprises is a MLM company that employs a distributor network to sell personal care and nutrition products through its Nu Skin and Pharmanex brands. Some investors and market participants believe all MLM companies are pyramid schemes, regardless of the product they are selling. This argument has credence. But the sustained success of MLM companies such as Herbalife (HLF) are proof that MLM businesses can succeed for long periods of time so long as the core products being marketed are good enough to continue to expand the MLM network.

Nu Skin falls under this umbrella of MLM success stories. Based on various product reviews, the Nu Skin and Phamanex products are legit, and consumers actually like them. As a result, Nu Skin has been able to grow its customer base from roughly 800,000 customers a decade ago, to nearly 1.2 million customers last quarter, while revenues have risen from $1.25 billion in 2008, to $2.68 billion in 2018. This huge customer and revenue growth is a large reason why NUS sock has rallied in a big way over the past decade.

 

ChartData by YCharts

 

From this perspective, NUS stock looks undervalued here. This is a company which has grown revenues at an 8% compounded annual growth rate over the past decade, reported constant currency revenue growth of 7% last quarter, and is projected to grow revenues by more than 5% next year. At the same time, this is also a company that has had roughly stable operating margins over the past decade, reported more than 140 basis points of operating margin expansion last quarter, and expects to see continued operating margin expansion over the next several quarters.

If the present combination of mid single digit revenue growth and slight margin expansion persists for the foreseeable future, then Nu Skin projects as a ~10% EPS grower over the next several years. Wall Street is actually slightly more optimistic on Nu Skin, and believes the company's long term profit growth rate will hover around 11% per year.

NUS stock presently trades at just 12x forward earnings for that 11% projected profit growth. Ostensibly, that's a steal. The S&P 500 is trading at a much bigger multiple (nearly 17x forward earnings) for only slightly bigger long term profit growth potential (~14%). Thus, if Nu Skin can actually grow EPS at a double-digit rate over the next several years, NUS stock looks materially undervalued at current levels.

 

ChartData by YCharts

 

The problem is the lack of visibility when it comes to Nu Skin's ability to grow profits at a 10%-plus rate over the next several years. In the absence of legal and regulatory headwinds, that growth rate seems doable. But legal and regulatory headwinds are as common to the narrative of an MLM company as timeouts are in a sporting game. They happen, all the time, and when they do happen, pretty much everything stops.

This happened most recently in China in 2014. In the early part of this decade, Nu Skin was benefiting from tremendous growth throughout the Chinese market (China revenues rose by nearly 150% in 2013). But, in early 2014, the state-run People's Daily published a story that called Nu Skin a pyramid scheme, and a day later, Chinese officials launched an investigation into the company. That investigation ultimately resulted in a two-year ban in China on recruitment and business meetings. The Nu Skin China growth narrative came to a screeching halt, and China revenues dropped more than 40% from 2013 to 2015. Because China represented such a big chunk of Nu Skin's overall revenues (43% in 2013), the wipe-out in the China business resulted in a wipe-out in Nu Skin's overall revenues (revenues dropped 30% from 2013 to 2015).

China could bring down a similar regulation hammer in 2019. Earlier this year, A Chinese woman died because she had relied solely on Nu Skin products to treat her flu and fever illnesses. She had been told by her 'mentor' in the MLM network that Nu Skin products would do the trick. They didn't, and the woman died. Nu Skin has subsequently launched an investigation into the matter, and terminated its contract with that 'mentor'. But given China's history with Nu Skin and their recent actions against other health product companies, it is somewhat likely that China takes action against Nu Skin in the foreseeable future. Such action could result in a big hit to what is still Nu Skin's biggest market (China accounted for 33% of revenues last year). If revenues do take a hit as a result of regulatory action, history shows that NUS stock will fall, too.

 

ChartData by YCharts

 

Overall, NUS is a cheap MLM stock that is cheap for a reason. Until regulatory headwinds in China clear up, and the long term profit growth trajectory gains visibility, NUS stock will likely remain depressed.

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