Zachary is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Nu Skin Enterprises (NYSE: NUS) are poised to trade higher over the next few quarters as the company rolls out a new product offering that should drive sales significantly higher.
With a well established global sales network, and a strong reputation for quality products, Nu Skin's highly-anticipated release of its new weight loss management system should act as a catalyst for a dramatic increase in the stock price.
Investors should do their homework now, and add Nu Skin to their portfolio before the data starts coming in from this new product launch. By that time, the stock price will likely already be much higher, and investors who delay will miss out on potential profits.
Mastering a specific niche
Nu Skin is a health and beauty company that focuses on anti-aging products. The company generates roughly half of its revenues from from its line of personal care products, and half from its nutrition segment.
Nu Skin sells its products through a direct marketing strategy. The company recruits independent sales representatives to peddle its products - thus allowing them to operate with lower overhead costs , and penetrate markets that might be otherwise unavailable.
While the company focuses on a relatively narrow product line, Nu Skin's geographic footprint is anything but narrow. Over the past 28 years, Nu Skin has been expanding its sales force to over 50 countries. Recently, the company has been experiencing strong growth in emerging markets, with Chinese operations reporting a 90% year-over-year increase last quarter.
The business model is a great example of a company that has developed a strong reputation in one area (anti-aging products), and aggressively expanded within its particular niche.
Nu Skin has grown to a very respectable market capitalization of $3.55 billion, with 2012 revenue of $2.17 billion. But despite its size, Nu Skin still has room to continue to grow. Analysts expect the company to earn $4.29 per share this year, which represents a 22% increase over 2012 earnings.
More importantly, these analysts have been increasing their expectations over recent weeks, as more information on the new product surfaces.
Over the past 28 years, the company has perfected the art of launching new products. When new products are introduced to the company's customer base, there is a drawn out process that takes place. This process includes extensive testing, education of the customer base in advance of the product being available, and of course a strong effort put into educating the company's sales force.
Given the company's skill at introducing new products, the loyalty of Nu Skin's customer base, and the strong consumer demand for a healthy weight loss system, Nu Skin's upcoming launch could turn out to be a major catalyst for investors.
Strong demand for health and beauty
Demand for health and beauty products continues to grow as the global population ages.
Ulta Salon (NASDAQ: ULTA) announced earnings this week, beating expectations and trading sharply higher. The company currently manages 576 stores in the US and will add another 125 stores this year due to increasing demand.
Same store sales for the company grew 6.7% last quarter with online sales increasing by 70%. Ulta doesn't represent quite the same compelling opportunity that I see in Nu Skin right now - primarily because analysts are keeping their estimates steady (expectations are not expanding), and the stock is trading at more than 23 times forward earnings.
But the company's strong performance, and premium stock valuation is a good example of tremendous consumer demand for health and beauty products.
Direct marketing done right
As noted Nu Skin sells its products through a direct marketing strategy. So how is it doing compared with other companies in that field?
Earlier this week, I mentioned the direct marketing platform operated by Herbalife (NYSE: HLF). Herbalife has been accused of operating a multi-level marketing scheme where it is unclear whether the company is profiting from selling its actual products, or simply by collecting dues from new sales associates.
While Herbalife continues to grow earnings aggressively, and is trading at an attractive multiple, the company's regulatory risk is a point of concern for some investors.
But Nu Skin operates its direct marketing platform much differently. Notably, 85% of customers who purchase products from Nu Skin never actually join the sales network. This is an important point, because it proves that the company is actually conducting legitimate business with it's widespread sales approach.
This sales approach is what has allowed the company to effectively branch out into new countries, and also what allows them to quickly get new products to their wide base of customers.
Growth at a (very) reasonable price
As mentioned, analysts currently expect the Nu Skin to earn $4.29 per share this year. In 2014, analysts expect the company to continue to grow earnings to $4.89 per share. And these estimates are being revised higher as analysts incorporate revenue from the new product into their models.
Nu Skin is currently trading at just over 14 times expected earnings for 2012.
Over the next year, I expect investors to be willing to pay at least 20 times earnings for this growth company. This is reasonable given the strong growth in earnings and revenue, along with increasing investor sentiment as Nu Skin effectively brings this new product to market.
At 20 times earnings, shares of Nu Skin would hit $97.80, well over a 50% increase from today's prices.
This increase could happen gradually, as quarterly sales figures trickle in, or it could happen suddenly (possibly after the company issues a press release offering sales figures for the new product).
The key here is to own the stock well in advance of the actual product launch (scheduled for the second half of 2013), in order to capture maximum profits!
Zachary Scheidt has no position in any stocks mentioned. The Motley Fool recommends Ulta Salon, Cosmetics & Fragrance. The Motley Fool owns shares of Ulta Salon, Cosmetics & Fragrance and has the following options: Long Jan 2014 $50 Calls on Herbalife Ltd.. 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!