Nu Skin Enterprises: Do the Risks Outweigh the Rewards?

Direct seller Nu Skin Enterprises' stock price has been on a roller-coaster ride lately, with the trigger coming from a business practices investigation by Chinese authorities back in January that has since been closed. Should investors bet on the long-term story?

Apr 9, 2014 at 10:00AM

Shareholders in direct-seller Nu Skin Enterprises (NYSE:NUS) have been enjoying a wealth-enhancing ride over the past few years, as the company's sales and stock price have followed rapid upward trajectories. Unfortunately for them, that ride hit a major speed bump in mid-January after China's Administration for Industry and Commerce announced an investigation into the company's business practices. While the investigation closed with relatively minimal punishment for Nu Skin and this led to a muted relief rally, the shares remain significantly below their pre-investigation level and they trade at a below-market P/E multiple of around 14. So is Nu Skin a good bet at current prices?


What's the value?
Nu Skin has been riding a global wave of interest in health and wellness products. This area accounts for roughly half of its sales, undoubtably aided by an obesity epidemic that is prodding people of all ages into lifestyle and diet changes. The company has also anecdotally benefited from the aging and increasingly affluent populations of certain developing countries, notably China. This has helped pump up sales of its skin care products, including those of its fast-growing ageLOC brand. While the direct-selling model has its share of critics, the model has proven to be an effective method of hawking health and wellness products and this has led to a generally solid growth trajectory for Nu Skin over the past 20 years.

In its latest fiscal year, Nu Skin continued to post strong results, highlighted by a 49% top-line gain that stemmed from solid sales volume growth and a sizable increase in its global independent sales force. More important, the company's profitability registered an even larger year-over-year gain thanks to greater per-representative productivity and scale efficiencies in its manufacturing supply chain, as evidenced by a five-year high in its gross margin. As a net result, Nu Skin recorded a sharp pickup in operating cash flow, which provided funds for more new product development, the lifeblood of a direct-selling enterprise.

With whatever means necessary
Of course, investors need to be cognizant of the downside risks associated with the direct-selling industry, as its critics seem willing to go to extraordinary lengths to make their points. While criticism of Nu Skin's operating model has been relatively benign, competitor Herbalife (NYSE:HLF) hasn't been so lucky. Herbalife has been forced to engage in virtually hand-to-hand combat over the past year with hedge fund Pershing Square, as its founder is convinced that he smells a pyramid scheme. As reported by The New York Times back in March, Pershing Square has more recently looked for assistance from the political establishment in Washington. This effort seems like it has paid off with the recent launch of an investigation by the Federal Trade Commission.

Despite the publicity distractions, Herbalife posted solid results for fiscal 2013, highlighted by an 18.5% gain in its top line that drew aid from an increase in the size and productivity of its independent sales force. Like Nu Skin, Herbalife benefited from a larger presence in China, where the company generated double-digit growth due to the procurement of additional direct-selling licenses and successful physical store expansion beyond high-profile urban markets. On the downside, though, Herbalife's profitability was clipped by a rise in its corporate overhead that partially resulted from higher professional and legal costs that it needed to protect itself from its myriad of detractors.

A better way to go
Naturally, the direct-selling industry also has its supporters. Most notably, these include iconic investor Carl Icahn, who has built a large position in Herbalife, complete with a growing number of board seats. However, the cloud over the industry's business practices seems likely to keep valuations at a below-market level. As such, investors looking for a health-and-wellness play would probably find better returns with a more traditional marketer like GNC Holdings (NYSE:GNC).

The king of the specialty retail nutrition business remains a growth story, as it reported an 8.2% top-line gain in its latest fiscal year, thanks primarily to an expanding roster of stores around the globe. While the company isn't a multilevel marketing organization, it does have a growing "direct-selling" presence via its online operations, which continued to expand at a double-digit pace during the period. GNC also continued to benefit from its partnerships with general merchandise retailers such as drugstore giant Rite Aid, which have helped to expand GNC's brand at minimal cost and allowed it to post an adjusted operating margin that hit a five-year high in fiscal 2013.

The bottom line 
While China closed its investigation into Nu Skin's business practices, the collateral damage seems unlikely to be swept away so easily. This is shown by the failure of Nu Skin's stock price to rebound to anywhere near the pre-investigation price level.  As such, prudent investors should probably watch the action in this volatile story from the sidelines.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Robert Hanley owns shares of GNC Holdings and Rite Aid. The Motley Fool has the following options: long January 2016 $57 calls on Herbalife. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information