Nu Skin (NUS 4.42%), the global provider of nutritional and personal care products, has just received the results of the investigation conducted by Chinese regulators and shares have reacted by making a sharp move higher. Let's take a detailed look at the results to find out what violations occurred, and the fines associated with these violations, to determine if the stock can sustain a rally back to where it was before the investigation was announced.
Source: Nu Skin
The investigation's results
As it turns out, Nu Skin did not make any major violations and it will only face two fines. First, the company must pay $524,000 for products that were not permitted to be sold by independent distributors; these products had been approved for sale in Nu Skin's retail locations in China, but were not approved for the direct selling channel. Secondly, a $16,000 fine was handed down for product claims that lacked support; in this situation, Nu Skin will have to obtain information to support its claims or the products will have to be removed from the market entirely.
In addition, six members of Nu Skin's sales team were handed personal fines of $241,000 for unauthorized promotional activities. In response to this, Nu Skin has been asked by the regulators to enhance the education and supervision of its sales team, which it has already begun doing. In summary, $540,000 in fines is minuscule for Nu Skin, who had $3.18 billion in sales in fiscal 2013, and I believe this low number is what caused shares to rally over 18% on the morning of the release.
Why is this important?
Source: Nu Skin
The large jump in the stock price is due to the immense growth and long-term potential of Nu Skin's products in China. In fiscal 2013, revenue in China increased 147.5% to $1.36 billion, including 248% growth in the fourth-quarter. The company will likely not achieve this high of growth in fiscal 2014, since it suspended all promotional meetings and the addition of new sales representatives during the investigation, but it is still expected to grow significantly. I believe the company will be most affected in the first quarter, but will immediately get back on track in the second quarter.
A competitor in the news
Source: Herbalife
In related news, Herbalife (HLF 1.43%) is also rallying higher on information that activist investor Carl Icahn's company will get three more seats on the board of directors. This will bring Icahn's total seat count to 5 out of the 13 on the board, which is significant given that he only owns about 16.8% of Herbalife's shares; regardless, shares have reacted by moving over 8% higher. Herbalife's stock still sits well below its 52-week high and is negative on the year, but this may be the nudge the stock needed to get it moving back in the right direction.
The Foolish bottom line
The investigation into Nu Skin resulted in minor fines and a slap on the wrist for the multi-billion dollar company. The stock has rallied over 18% in the trading day and this could only be the beginning of a rise back toward its 52-week high, which it is more than 36% below today. Foolish investors who are seeking to pick up a position in the growing nutritional products industry should take a deeper at Nu Skin as it is undervalued at current levels and is well-positioned to grow for many years to come.
