Sorry Citron, This Company Isn't a MLM

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Skin care industry is well established in the developed nations, and is catching up quickly in the emerging markets like India and China. These countries are the world’s top two populated countries, and it is due to this reason that investors are always bullish on consumer goods companies exposed to the duo. Nu Skin Enterprises (NYSE: NUS) is one such consumer goods company and here are a few reasons why you should be bullish about it.

The company based in the US, is a consumer goods company that offers a wide range of skin care products ranging from fairness products to dietary supplements. The firm faces competition from Amway, Avon Products (NYSE: AVP) and Herbalife (NYSE: HLF). Nu Skin which is a direct selling company, has more than 550,000 distributors in 52 countries globally.

The company with a market capitalization in excess of $2 billion had a blockbuster previous fiscal year wherein it posted its record earnings of $1.74 billion. The company has a strong presence in China and a McKinsey report claims that the Chinese spending on healthcare products will increase at the rate of 13.9% annually, until 2020. Going by this report, China offers the company a good growth potential to grow over the next decade.

In the recent earnings release, the quarterly earnings saw a 45% jump compared to the same period last year. Operating income saw an increase by 0.9% and the operating income witnessed a jump of 48.2%. The total sales too joining the party, saw an upside of 39%, with all the numbers being compared to the year ago quarter. The numbers proved to be staggering in every regard and the company on the back of its strong earnings, increased its dividend by 25%. The management also increased its earnings guidance by nearly 9% and as of now, the stock has a 2.1% annual yield.

Recently the company also announced that it would be nearly tripling its number of stores and support centers in China over the next five years. The management expects that the expansion would not only increase the company's penetration in the country but would also enhance the efficiency of its product distribution chain.

<img src="/media/images/user_13723/acbbb_large.JPG" />

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Debt/Equity</p> </td> <td> <p>P/E</p> </td> <td> <p>Gross Profit Margin</p> </td> <td> <p>P/S</p> </td> </tr> <tr> <td> <p>Nu Skin</p> </td> <td> <p>0.39</p> </td> <td> <p>11.62</p> </td> <td> <p>83.7%</p> </td> <td> <p>1.1</p> </td> </tr> <tr> <td> <p>Herbalife</p> </td> <td> <p>2.05</p> </td> <td> <p>12.26</p> </td> <td> <p>80.24%</p> </td> <td> <p>1.35</p> </td> </tr> <tr> <td> <p>Avon Products</p> </td> <td> <p>2.48</p> </td> <td> <p>27.7</p> </td> <td> <p>61.5%</p> </td> <td> <p>0.62</p> </td> </tr> </tbody> </table>

The financial metrics suggest that Nu Skin the best price/sales ratio amongst the peers. Also the company has the least debt to equity which is a sign of a healthy company. Besides sporting the highest gross profit margins amongst the peers, the metrics indicate that the Nu Skin is still undervalued.

However due to a controversy in China, the company’s stock price took a deep dive. According to a Chinese law, multi-level-marketing is illegal in the country and Citron in its research report claims that Nu Skin is operating with the illegal business model, which to me looks incorrect.

An MLM pays commissions to its distributors for every sale they make. Nu Skin on the contrary pays its distributors regular salaries along with healthcare packages, and incentives to keep its sales force motivated. This happens in most of the marketing companies and it doesn’t sound like an MLM to me. To add to the company's defense, Nu Skin had obtained its business license and due permissions from the Chinese authorities which allow the company to operate as a “Direct Sales Organization”.

The report by Citron also claims that one of the Nu Skin’s new products was rejected by the FDA. In defense, Nu Skin’s new product “Galvanic Spa Facial” was never rejected by the FDA. The decision to approve or disapprove is still pending, which throws Citron’s theory out of the window.

Conclusion

The claims of Citron seem rubbish to me. The company looks good with its stellar performance, and beats the peers with both stock returns and financial metrics. The Chinese market has a huge growth opportunity and it looks like the party has started for Nu Skin. I believe that investor have an opportunity to enter the stock while it’s still available at current low valuations, as in my opinion, this stock should skyrocket in the near term future.


PiyushArora 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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