The Risk Ahead with this Nutrition Company

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

USANA Health Sciences (NYSE: USNA) has experienced quite a bit of volatility over the last year. In the beginning of 2011 the company was selling for around $43 per share, but then it plunged to $23.60 four months later. Afterwards, it shot up to nearly $49 in September 2012, and it is currently trading at around $39.

Actually, USANA was in the portfolio of Joel Greenblatt in the first quarter in 2011. The main thesis for buying USANA at that time was the superb return on equity, low leverage, significant discount valuation compared to its peers, and insider buying.  However, just recently, the stock tanked by more than 8% within a day due to the management shake up. In addition, negative research about the company has been released, along with the risk of a multi-level marketing model. It is time to look at USANA to see whether investors should come in and wait for more price depression, or just walk away from the stock. 

Management Shakeup

Roy Truett, the COO of USANA, has had his resignation accepted by the company, and Jim Brown, the Chief Production Officer, will come ahead to manage the operations of the company. Roy is still young at 44 years old, and he has worked at the company since 2003. In addition, the young executive Doug Hekking, only 42, will step down from the CFO position to return to support the groups of finance and operation, due to family health matters.

USANA is still led by its founder, Dr. Myron Wentz, the current chairman. As of fiscal 2011, Myron Wentz is the largest controlling shareholder in the company. He effectively holds 52% of USANA, including the stakes held by his 100%-owned Gull Holdings. However, in the last few months, Wentz and Gull Holdings have kept selling out the company’s shares in the open market. Since December, the founder has sold 464,050 shares, with the total transaction value more than $20 million. Not a good signal.

Recent Negative Research on USANA

Citron Research just released a report on the company’s activity in China. Citron mentioned that USANA was operating a multilevel marketing in China; thus, the claim of double-digit top and bottom line growth was not sustainable. Citron has a similar research on Nu Skin Enterprises (NYSE: NUS), revealing the company’s operation MLM in China, the “apparent violation of FDA and/or FTC regulator law in the US,” and questioning the scientific research with Stanford University for the company's AgeLOC products. 

USANA has disclosed in their 2011 10-K filing that over the last 3 years Greater China has become the largest revenue source for the company. In 2011, China brought nearly $205 million in revenue, accounting for 35.2% of the total sales, whereas the second ranked US generated around $148 million, or 25.4%, of total sales. For Nu Skin, China only accounted for 20% of their sales in 2011. The biggest portion of its revenue has come from Northern Asia, accounting for up to 43% of its total revenue, with the concentration in Japan (27% of revenue) and South Korea (16% of revenue).

The General Risk of This Business Model

I have covered a topic on the risk of the direct selling model, which investors should care about before investing in those companies. David Einhorn has looked into this field as well, by showing up at the Herbalife earnings conference to ask for more details. He was curious about the sales the company made outside its network, the sales percentage among three main distributor groups including self consumers, small retailers and potential sales leaders; and the incentive difference between direct selling the product and recruiting new distributors. He hasn’t made any move in the stock, long or short, but his appearance in the earnings call sent shares plunging that day.

Foolish Bottom Line

Even Zacks ranked the company in its Aggressive Growth Portfolio as a Zacks #1 Rank (Strong Buy). However, with all the recent glitches and the huge insider sells, investors should be careful about initiating a position now.

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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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