Which Direct Selling Stock for Investors Now?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Direct selling, or network marketing, is a good business model. It allows for an agent with little capital to start a business. An agent doesn’t have to commit a lot of cash or huge inventories to begin. In addition, it is an efficient method to reach end-users, as an agent would sell products to consumers directly via his/her own relationships and referrals. However, year-to-date, direct selling/network marketing companies, including Herbalife (NYSE: HLF), Avon (NYSE: AVP), and Nu Skin (NYSE: NUS), have not performed well in the stock market. 

<img src="/media/images/user_14219/screen-shot-2012-11-02-at-53516-pm_large.png" />

Avon is the worst performer, with a nearly -11% return, whereas the best performer is Nu Skin, with nearly 1% return year-to-date. The reason for Nu Skin's solid results was the recent 13% jump in its stock price, after it released impressive third quarter results.

Its revenue for the third quarter was $526 million, 22.8% growth compared to the same period last year. The largest revenue contribution area was North Asia, with $184.7 million, and Greater China, with $136.6 million. The growth in its top line was mainly contributed by a spectacular 64% growth in Greater China and 47% growth in South Asia/Pacific region. The company’s net income was $54.18 million, 15.8% higher than Q3 2011. Its diluted EPS was $0.87, beating analysts’ expectation of $0.77. At the current price of $48.95 per share, the total market capitalization is $2.93 billion. Over the previous twelve months, its EPS is $3.31. So the market is valuing the company at nearly 14.8x earnings.

Nu Skin has a quite strong and liquid balance sheet. As of September 2012, the company had nearly $550.4 million in stockholders’ equity. Long term-debt was $182.8 million. The main item in liabilities was accrued expenses, which accounted for $230.5 million. It has nearly $323 million in cash.

In the last 5 years, Herbalife and Nu Skin have delivered great returns to shareholders with consistent dividend payment and decent capital appreciation. But Avon has been quite a disappointment. 

<img src="/media/images/user_14219/screen-shot-2012-11-02-at-60415-pm_1_large.png" />

Including the reinvested dividends, Nu Skin was the best performer, with more than 220% return in 5 years, whereas Avon was still the worst performer, creating a loss of nearly 53% for shareholders. A quick look at operating figures would help.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>HFL</strong></p> </td> <td> <p><strong>NUS</strong></p> </td> <td> <p><strong>AVP</strong></p> </td> </tr> <tr> <td> <p><strong>Net margin (%)</strong></p> </td> <td> <p>11.9</p> </td> <td> <p>10.3</p> </td> <td> <p>2.3</p> </td> </tr> <tr> <td> <p><strong>ROIC (%)</strong></p> </td> <td> <p>45.9</p> </td> <td> <p>28.4</p> </td> <td> <p>4.9</p> </td> </tr> <tr> <td> <p><strong>D/E</strong></p> </td> <td> <p>1.2</p> </td> <td> <p>0.3</p> </td> <td> <p>1.9</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>13.3</p> </td> <td> <p>14.8</p> </td> <td> <p>27</p> </td> </tr> <tr> <td> <p><strong>Dividend yield (%)</strong></p> </td> <td> <p>2.1</p> </td> <td> <p>1.6</p> </td> <td> <p>5.8</p> </td> </tr> </tbody> </table>

Indeed, there is a reason for Avon’s negative return for shareholders over the years. Its net margin and return on capital are the lowest among the three, whereas Herbalife has the highest metrics. Herbalife’s net margin is 11.9%, nearly 6 times higher than Avon’s, and its return on invested capital is 45.9%, nearly 10 times higher than Avon’s. Nu Skin has the lowest leverage level among the three, with a nice return on invested capital but lowest dividend yield.

Foolish Bottom Line

Both Herbalife and Nu Skin seem to be good investments for long-term shareholders. Personally, I would rather not invest in Avon because of its sluggish operating performance and a high valuation. I like Herbalife the best, with the highest net margin and return on invested capital, as well as a decent dividend yield and the lowest earnings valuation. 


hoangquocanh 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.

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