Rating Update: Stock Rating F-Lowest (9/12/19)-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 be above 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 F (Lowest Rating).
The Value Trend Rating reflects inconsistent signals from PTR’s two proprietary measures of a stock’s attractiveness. Nu Skin Enterprises has a neutral Appreciation Score of 55 but a very low Power Rating of 3, with the Lowest Value Trend Rating the result.

Nu Skin Enterprises’ stock is selling well below targeted value. The current stock price of $44.28 compares to targeted value 12 months forward of $56.
This neutral appreciation potential results in an appreciation score of 55 (45% of the universe has greater appreciation potential.)
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Nu Skin Enterprises has a Power Rating of 3. (NUS’ very low Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 3% of companies in the universe.)
Factors contributing to this very low Power Rating include: recent price action has been extremely unfavorable; the trend in NUS’ earnings estimates has been unfavorable in recent months; and is currently in an unfavorable positi.

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 slightly more Value than Growth characteristics; its appeal is likely to be to Income-oriented investors; the perception is that NUS is normal risk. Relative weaknesses include: low expected growth, and low historical growth. NUS’ valuation is low: high dividend yield, low 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 very weak. The stock price is in a 3.0 month down move. The stock has declined 24.9% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

The stock is currently rated F.
Nu Skin Enterprises Inc. (NYSE: NUS) stock suffered a major decline of -18.3% on 9/12/19. The shares closed at $1.38. NORMAL trading volume accompanied the decline. The stock has risen 8.3% during the last week but has been extremely weak relative to the market over the last nine months.

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 pulled out -$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 second quartile and top 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 stability 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 at the 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 second quartile and third 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 2019.
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 suffered a strong overall 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 (14.9%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is at the lower quartile (12.5%) reflecting asset turnover that is at the upper quartile (1.45X) and pretax margin at the lower quartile (8.6%).
Tax “keep” rate (income tax management) is lower quartile (55.5%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is at median (2.15X).

GROWTH RATES

Overall, Nu Skin Enterprises’ growth rate has slowed very considerably in recent years.
Nu Skin Enterprises’ historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 7.4% per year. (More recently it has been -0.5%.)

Total asset growth has been 10.0% per year. (More recently it has been 1.6%.)

Annual E.P.S. growth has been 2.3% per year.

Equity growth has been 8.2% per year. (More recently it has been -1.0%.)

Nu Skin Enterprises’ consensus growth rate forecast (average of Wall Street analysts) is 1.8% — substantially below 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 (8.2%) has been at the upper quartile. Total asset growth (10.0%) has been above median. Revenue growth (7.4%) has been slightly below median. E.P.S. growth (2.3%) has been lower quartile.

Consensus growth forecast (1.8%) is lower 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 November, 2008 and September, 2019, Nu Skin Enterprises’ stock price rose +312%; relative to the market, this was a +23% 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 -43.8% 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 July, 2019 of -43.8% is lower quartile relative to Nu Skin Enterprises Inc. Peer Group.

Current 5-year total return performance of -4.8% is lower quartile relative to the S&P 500 Composite.
Through July, 2019, with lower quartile current 5-year total return of -4.8% 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 quite low. The highest factor, the ratio of enterprise value/assets, is slightly below median. Price/earnings ratio is slightly below median. Price/equity ratio is slightly below 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 quite low. Four of five factors are upper quartile. The highest factor is the price/earnings ratio, followed by the ratio of enterprise value/assets, then by the ratio of enterprise value/earnings before interest and taxes, then by the price/equity ratio. The lowest factor, 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 1.01X to 2.01X. If NUS’ ratio of enterprise value/revenue were to rise to 2.01X, its stock price would be higher by $47 to $92.
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 1.01X to 2.51X. If NUS’ ratio of enterprise value/revenue were to rise to 2.51X, its stock price would increase by $71 from the current level of $44.

VALUE TARGETS

With future capital returns forecasted to be above the cost of capital, NUS is expected to continue to be a major Value Builder.
Nu Skin Enterprises’ current Price Target of $58 represents a +31% change from the current price of $44.28.
This neutral appreciation potential results in an appreciation score of 55 (45% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 55, the low Power Rating of 3 results in an Value Trend Rating of F.
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Nu Skin Enterprises’ current Price Target is $58 (+14% from the 2018 Target of $51 and +31% from the 09/12/19 price of $44.28). This slight rise in the Target is the result of a +5% increase in the equity base and a +8% increase in the price/equity multiple. The forecasted decline in return on equity has a slight negative impact on the price/equity multiple and the forecasted increase in cost of equity has a very slight negative impact as well. More than offsetting these Drivers, the forecasted increase in growth has a very large positive impact.
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PTR’s return on equity forecast is 23.1% — slightly below 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 10.2% — 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 $44.28, investors are placing a positive value of $6 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 $58 is based on these forecasts and reflects an estimated value of existing assets of $38 and a value of future investments of $20.

About John Lafferty 79010 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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