Grab These 2 Consumer Stocks at Bargain Prices
Anjali is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The shares of direct selling companies like Nu Skin (NYSE: NUS) and Herbalife (NYSE: HLF) have been under pressure since May for various reasons. The following chart summarizes the price movement of these companies since May.
We can see that both these companies have extensively underperformed the broader markets over this period. While S&P500 has gained more than 3% over this period, Herbalife and Nu Skin have corrected 25.7% and 19.85%, respectively. Let’s analyze both these companies individually to see if this correction provides a buying opportunity.
Herbalife
The fact that recognized short seller David Einhorn asked questions (on Q1 earnings conference call on May 1) put pressure on Herbalife's stock price. However, the concerns potential short sellers are raising on the Herbalife’s multi-level marketing business model appears unwarranted and there is nothing new about them. Virtually the same allegations were made in 2007 against Herbalife and after an investigation from SEC, Herbalife was given a clean bill of health. Following a steep decline, the stock appears cheap on a PEG basis (PEG ratio=0.86) and looks like a good bargain at current levels. Going forward, I think China will be strong long term growth driver as the company has a limited presence in China (China represents Herbalife’s smallest region, sales wise). Moreover, the rapidly growing nutritional supplement market offers a huge runway for growth. In addition, Herbalife's profit pool is less centered on one geographic region which makes the risk profile for Herbalife more attractive than its public global direct selling industry peers. Thus, I recommend buying it.
Nu Skin
Nu Skin is trading at a forward P/E of 11.61 which represents a 27% discount to the 10-year average of 15.8x forward earnings. Einhorn’s questioning on Herbalife took its toll on Nu Skin as well and Nu Skin shares fell in conjunction with Herbalife as the two companies have a similar direct selling business model. Herbalife’s stock further took a beating due to a short-seller’s allegations of operating an illegal multi-marketing marketing scheme in China. However, there is no ground for making such allegations against the company as it operates differently in China than in other countries—with physical stores as well as direct sales (where permitted), in order to comply with Chinese regulations. The company said in a statement that it has an eight-year history of doing business in China under these regulations, and the government has regularly reviewed our business activities. Thus, I see no reasons for investors to panic and instead look this as a good buying opportunity as the company looks highly undervalued on a PEG basis (PEG ratio=0.84).
Let’s compare some key metrics of Herbalife and Nu Skin with Avon Products (NYSE: AVP).
|
Company |
Herbalife |
Nu Skin |
Avon Products |
|
Forward P/E |
11.56 |
11.61 |
17.44 |
|
EV/EBITDA |
8.62 |
6.75 |
9.02 |
|
Profit Margin |
12.05% |
10.34% |
2.30% |
|
Operating Margin |
16.59% |
15.78% |
7.58% |
|
Return on Assets |
26.72% |
19.30% |
6.57% |
|
Return on Equity |
104.97% |
38.04% |
14.71% |
We can see that both Herbalife and Nu Skin score over Avon Products in terms of profitability, return on assets, as well as return on equity. However, both Herbalife and Nu Skin are trading at over 30% discount to Avon. Avon offers a higher dividend yield but that alone should not justify such a premium. Thus, I believe the market’s negative perspective of Herbalife and Nu Skin is overblown and the current share prices are a good bargain. Nu Skin was able to able to post 4% organic growth even during the 2008-2009 recession and thus, I believe the company has defensive characteristic and is a good addition to investor’s portfolio. On the other hand, Herbalife has strong long term growth prospects due to a rapidly growing nutrition supplement market and a huge white space opportunity in China and thus, I recommend it as a good long term buy.
AnjaliPaliwal 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.If you have questions about this post or the Fool’s blog network, click here for information.
