Rating Update: Stock Rating D-Negative (5/16/19)-Nu Skin Enterprises Inc. (NUS).

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BUSINESS

Nu Skin Enterprises, Inc. develops and distributes anti-aging personal care products and nutritional supplements under the Nu Skin and Pharmanex category brands worldwide. It provides skin care systems and targeted treatment products, including ageLOC Me customized skin care systems, ageLOC Spa systems, and ageLOC LumiSpa skin treatment and cleansing devices; and Epoch products, as well as a range of other cosmetic, personal care, and hair care products. The company also offers ageLOC Youth nutritional supplements, ageLOC TR90 weight management and body shaping systems, and LifePak nutritional supplements, as well as other anti-aging nutritional solutions and weight management products. In addition, it is involved in the research and product development of skin care products and nutritional supplements.
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INVESTMENT RATING

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With future capital returns forecasted to exceed the cost of capital, NUS is expected to continue to be a major Value Builder.

Nu Skin Enterprises has a current Value Trend Rating of D (Negative).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing inconsistent signals. Nu Skin Enterprises has a neutral Appreciation Score of 58 but a very low Power Rating of 10, leading to the Negative Value Trend Rating.

Nu Skin Enterprises’ stock is selling well below targeted value. The current stock price of $52.50 compares to targeted value 12 months forward of $68.
This neutral appreciation potential results in an appreciation score of 58 (42% of the universe has greater appreciation potential.)
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Nu Skin Enterprises has a Power Rating of 10. (This very low Power Rating indicates that NUS only has a better chance of achieving attractive investment performance over the near to intermediate term than 10% of companies in the universe.)
Factors contributing to this very low Power Rating include: recent price action has been unfavorable; is currently in an unfavorable positi; and earnings estimate behavior for NUS has been slightly negative recently.

INVESTMENT PROFILE

NUS’ financial strength is high. Financial strength rating is 78.
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Relative to the S&P 500 Composite, Nu Skin Enterprises Inc. has neutral Growth/Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that NUS is lower risk. Low historical growth is a relative weakness for NUS. NUS’ valuation is moderate: high dividend yield, moderate P/E ratio, and moderate price/book ratio. NUS has unusually low market capitalization.

CURRENT SIGNALS

Nu Skin Enterprises’ current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.

Nu Skin Enterprises’ current technical position is mixed. The stock price is in a 1.2 month up move. The stock has appreciated 22.4% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Recent notable negative changes in investment behavior have affected Nu Skin Enterprises Inc. (NYSE: NUS): negative upside/downside volume developed.
The stock is currently rated D.
On 5/16/19, Nu Skin Enterprises Inc. (NYSE: NUS) stock enjoyed a major increase of 17.3%, closing at $0.61. However, this advance was accompanied by unusually low trading volume at 62% of normal. Relative to the market the stock has been extremely weak over the last nine months and has declined -4.9% during the last week.

CASH FLOW

In 2018, Nu Skin Enterprises experienced a slight decrease in cash of -$40.0 million (-9%). Sources of cash were slightly lower than uses. Cash generated from 2018 EBITDA totalled +$393.5 million. Non-operating uses consumed -$77.3 million (-20% of EBITDA). Cash taxes consumed -$116.3 million (-30% of EBITDA). Re-investment in the business amounted to -$214.4 million (-54% of EBITDA). On a net basis, debt investors contributed +$19.1 million (+5% of EBITDA) while equity investors withdrew -$44.6 million (-11% of EBITDA).
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Nu Skin Enterprises’ Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Nu Skin Enterprises Inc. Peer Group. In most years, Nu Skin Enterprises was in the lower quartile and top quartile. Currently, Nu Skin Enterprises is lower quartile at -20% of EBITDA (-$77.3 million).

Nu Skin Enterprises’ Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Nu Skin Enterprises Inc. Peer Group. In most years, Nu Skin Enterprises was in the second quartile and top quartile. Currently, Nu Skin Enterprises is lower quartile at -30% of EBITDA (-$116.3 million).

Nu Skin Enterprises’ Business Re-investment, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Nu Skin Enterprises Inc. Peer Group. (Since 2015 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Nu Skin Enterprises was in the top quartile and second quartile. Currently, Nu Skin Enterprises is substantially below median at -54% of EBITDA (-$214.4 million).

Nu Skin Enterprises’ Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Nu Skin Enterprises Inc. Peer Group. In most years, Nu Skin Enterprises was in the top quartile and third quartile. Currently, Nu Skin Enterprises is upper quartile at +5% of EBITDA (+$19.1 million).

Nu Skin Enterprises’ Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Nu Skin Enterprises Inc. Peer Group. (Since 2016 Equity Investors, %EBITDA has experienced a very sharp recovery.) In most years, Nu Skin Enterprises was in the third quartile and top quartile. Currently, Nu Skin Enterprises is upper quartile at -11% of EBITDA (-$44.6 million).

Nu Skin Enterprises’ Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Nu Skin Enterprises Inc. Peer Group. In most years, Nu Skin Enterprises was in the top quartile and second quartile. Currently, Nu Skin Enterprises is substantially below median at -10% of EBITDA (-$40.0 million).
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Nu Skin Enterprises’ Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Nu Skin Enterprises Inc. Peer Group as well. In most years, Nu Skin Enterprises was in the top quartile and second quartile. Currently, Nu Skin Enterprises is above median at +15%.

PROFITABILITY

Nu Skin Enterprises’ return on equity reached a new post-2009 low in 2018.
This was due to very strong negative trend in pretax operating return and little change in non-operating factors.
The productivity of Nu Skin Enterprises’ assets declined over the full period 2009-2019: asset turnover has experienced a minor downtrend.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend that accelerated very sharply from the 2017 level.
Non-operating factors (income taxes and financial leverage) had little influence on return on equity.
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Nu Skin Enterprises’ return on equity is lower quartile (15.9%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is at the lower quartile (12.8%) reflecting asset turnover that is upper quartile (1.53X) and lower quartile pretax margin (8.4%).
Tax “keep” rate (income tax management) is lower quartile (57.4%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is at median (2.16X).

GROWTH RATES

Overall, Nu Skin Enterprises’ growth rate has slowed very considerably in recent years.
Nu Skin Enterprises’ historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 7.6% per year. (More recently it has been -0.2%.)

Total asset growth has been 9.9% per year. (More recently it has been 1.4%.)

Annual E.P.S. growth has been 3.2% per year.

Equity growth has been 8.0% per year. (More recently it has been -1.4%.)

Nu Skin Enterprises’ consensus growth rate forecast (average of Wall Street analysts) is 11.1% — above the average of the historical growth measures.
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Relative to the Nu Skin Enterprises Inc. Peer Group, Nu Skin Enterprises’ historical growth measures are highly erratic. Equity growth (8.0%) has been at the upper quartile. Total asset growth (9.9%) has been above median. Revenue growth (7.6%) has been at median. E.P.S. growth (3.2%) has been lower quartile.

Consensus growth forecast (11.1%) is at the upper quartile.
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PRICE HISTORY

Over the full time period, Nu Skin Enterprises’ stock price performance has been variable and quite good. Between July, 2008 and May, 2019, Nu Skin Enterprises’ stock price rose +225%; relative to the market, this was a +43% gain. Significant price moves during the period: 1) February, 2016 – September, 2016: +112%; 2) December, 2013 – January, 2015: -70%; 3) December, 2012 – December, 2013: +273%; 4) June, 2010 – March, 2012: +132%; and 5) February, 2009 – April, 2010: +220%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -27.0% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through April, 2019 of -27.0% is lower quartile relative to Nu Skin Enterprises Inc. Peer Group.

Current 5-year total return performance of -7.7% is lower quartile relative to the S&P 500 Composite.
Through April, 2019, with lower quartile current 5-year total return of -7.7% relative to S&P 500 Composite, Nu Skin Enterprises’ total return performance is lower quartile relative to Nu Skin Enterprises Inc. Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, NUS’ overall valuation is normal. The highest factor, the ratio of enterprise value/assets, is above median. Price/equity ratio is slightly above median. Price/earnings ratio is above median. Ratio of enterprise value/earnings before interest and taxes is lower quartile. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.

Relative to Nu Skin Enterprises Inc. Peer Group, NUS’ overall valuation is low. The highest factor, the price/earnings ratio, is at the upper quartile. Ratio of enterprise value/earnings before interest and taxes is lower quartile. Ratio of enterprise value/assets is near the lower quartile. Price/equity ratio is near the lower quartile. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.
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Nu Skin Enterprises has a major value gap compared to the median. For NUS to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.10X to 1.83X. If NUS’ ratio of enterprise value/revenue were to rise to 1.83X, its stock price would be higher by $35 to $88.
For NUS to achieve upper quartile valuation relative to the Nu Skin Enterprises Inc. Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.10X to 2.43X. If NUS’ ratio of enterprise value/revenue were to rise to 2.43X, its stock price would increase by $64 from the current level of $52.

VALUE TARGETS

With future capital returns forecasted to exceed the cost of capital, NUS is expected to continue to be a major Value Builder.
Nu Skin Enterprises’ current Price Target of $76 represents a +44% change from the current price of $52.50.
This neutral appreciation potential results in an appreciation score of 58 (42% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 58, the low Power Rating of 10 results in an Value Trend Rating of D.
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Nu Skin Enterprises’ current Price Target is $76 (+49% from the 2018 Target of $51 and +44% from the 05/16/19 price of $52.50). This dramatic rise in the Target is the result of a +6% increase in the equity base and a +40% increase in the price/equity multiple. The forecasted increase in growth has a very large positive impact on the price/equity multiple and the forecasted increase in return on equity has a large positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a slight negative impact.
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PTR’s return on equity forecast is 29.2% — slightly above our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly below the 2013 peak of 44%.

PTR’s growth forecast is 6.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly below the 2014 peak of 19%.

PTR’s cost of equity forecast is 10.5% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic decline between 2010 and 2018. The current forecast is steady at the 2014 peak of 12.2%.
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At Nu Skin Enterprises’ current price of $52.50, investors are placing a positive value of $14 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 3.0% per year, and a return on equity of 25.1% versus a cost of equity of 10.1%.
PTR’s 2020 Price Target of $76 is based on these forecasts and reflects an estimated value of existing assets of $47 and a value of future investments of $29.

About John Lafferty 40696 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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