Nu Skin's Troubles in China

China isn't the land of hot opportunities for everyone. Based partly on its woes there, NuSkin (NYSE:NUS) announced this morning that it was cutting its own expectations for the current third quarter and the coming fourth quarter as well. The third-quarter damage lowers earnings estimates to between $0.24 and $0.26, vs. $0.29 to $0.30.

Like Tupperware (NYSE:TUP), Nu Skin relies on a direct-selling model to reach its customers. With direct-selling laws being changed in China, the company can't operate there the same way it does in the U.S. and Japan, its other two large markets. The changes in its direct-selling model caused the company to lose more sellers than expected, trimming its revenue expectations by 11%.

With all of the bad news for the next few months, it would be very easy to look down on the company's shares. Instead, I see an interesting opportunity here, given Nu Skin's valuation, dividends, and future prospects. Let's tackle each of these items.

After the 14% hammering Nu Skin has taken today, it trades at a P/E of about 14. However, the company generates stronger free cash flow than it does accounting earnings, which means there is some value hidden below the P/E. Add to that the near 2% dividend yield, which is amply funded by free cash flow, and the valuation gets more attractive.

This company also has a history of driving mid-to-high single-digit growth, and despite the expected shortfall this year, the company believes China will work out well in the long term. In addition to China, the company is also expanding into Southeast Asia, which provides additional long-term growth opportunities.

Nu Skin's business model is not the same as EsteeLauder (NYSE:EL) or other traditional retailers of skin care products, but what it sacrifices in retail visibility, it gains in better free cash flow generation. Finally, China and Japan's status as the source of a large portion of Nu Skin's revenues could become an important factor if the dollar weakens like a number of folks expect.

For further Foolishness:

• Nu Skin's Hidden Beauty
• Estee Lauder Lives On

Want to rejuvenate your portfolio with stocks that pay truly beautiful dividends? Sign up today a free 30-day trial to Motley Fool Income Investor.

Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an iron-clad disclosure policy.