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Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
People have always wanted to look young. We used to wear tons of makeup, even men, some of us still do. We go to the gym, we eat healthy, and still nothing ultimately prevents aging. A more modern solution is “anti-aging” skin and health care products from the likes of Nu Skin Enterprises (NYSE: NUS), Avon Products (NYSE: AVP), and Herbalife (NYSE: HLF).
All three of these companies have seen significant declines in share price since the end of April. Citron Research has accused Nu Skin of violating multi-level marketing laws in China. Meanwhile, famed short-seller David Einhorn implied Herbalife is running a pyramid scheme. More recently, Avon reported weak earnings for the most recent quarter and was forced to cut its dividend a whopping 73% for the current quarter causing the stock to slide further.
I believe Nu Skin and Herbalife can overcome the bearish sentiment from the big money players, but Avon has deeper issues that the company needs to take care of before it becomes a good investment.
While Nu Skin and Herbalife are showing strong revenue growth, Avon Products is lagging the competition. Nu Skin and Herbalife have grown revenues 14.5% and 18.3% respectively over the last three years, while Avon has grown just 2.1%. Moreover, Avon has experienced a 6.4% drop in revenues from last year, year-to-date.
Strong revenue growth for Nu Skin is led by the company’s operations in China. Nu Skin is expanding aggressively in Asia, and expects 58% revenue growth in China for 2012. Currently, the company earns about 25% of revenues from the country, and 78% of revenues from all of Asia. It is growing to become the dominant force in China as the economy begins expanding once again and discretionary spending increases.
Meanwhile, Herbalife has very little presence in China, which presents it with a good prospect for long-term growth. However, as I mentioned earlier, China has strict laws against multi-level marketing, meaning Herbalife may need to change its marketing model slightly as Nu Skin did by opening up stores to both sell its products and advertise the business opportunity for sales people.
Since 2009, both Nu Skin and Herbalife have grown their net profit margin quite nicely, however, Avon saw net profit margin fall significantly this year due to similar levels of SGA expenses while revenues fell.
Perhaps with the cut in dividend, Avon can invest in growing the top line again and reducing its overhead expenses. It has maintained gross profit margin fairly well with over 60% each year since 2005, so solving the operating expense issues should be priority number one for the company, now that it has lowered its payout ratio.
On the other hand, Nu Skin and Herbalife have posted excellent margins. Nu Skin has grown net profit margins every year since 2006 except last year, when the company saw net profits fall by just 10 basis points. Herbalife sports a similar record, increasing its profit margin every year during that period except 2009 when it fell 70 basis points, but bounced back nicely increasing 220 basis points in 2010.
Out of these three companies, Nu Skin has by far the best balance sheet. Its total debt to equity ratio is just 0.38 well below the industry average of 0.62, and well below both Herbalife and Avon with D/E ratios of 1.95 and 2.32 respectively. Its quick and current ratio are 1.3 and 2.0 where Herbalife and Avon fall short with quick ratios of 0.7 and current ratios of 1.4 each.
In other words, Nu Skin is funding its growth with mostly equity, and managing debt quite effectively. This means that its high ROE numbers are not inflated by overleveraging itself. Herbalife has posted significantly higher ROE, but has done so with significantly more debt than Nu Skin. At the same time, Avon is using leverage to grow the company, and had been doing well until its fall this year.
Even with the fall in stock price this year, Avon products is not trading at much of a discount. Forward earnings estimates have fallen faster than the stock, and it now trades at 18.6 times forward earnings. This is lower than its historical 21.3 times earnings, but is still overpriced compared to the competition. Nu Skin and Herbalife trade at 13 and 12.1 times forward earnings respectively with much better prospects for growth. Both have PEG ratios of about 0.8 with five-year expected growth rates of 17.1% and 15.1%.
Which One for Your Portfolio
I believe Nu Skin currently offers investors with the best opportunity to grow their money. It operates very similarly to Herbalife, but carries a couple distinct advantages. First, it already has a great market position in China. Second, its balance sheet is better with lower levels of debt that the company can easily cover.
On the other hand, Herbalife has posted great earnings for the past few years, and still hasn’t made significant progress in expanding into Asia. If the company begins to tackle that market, and potentially takes market share from Nu Skin, it could prove to be the better investment.
adamlevy has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!