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Will Investment in Nu Skin Age Well?

By Steve Alexander, MagicDiligence.com

NEW YORK (Magic Diligence) -- Nu Skin Enterprises (NUS) is a global direct marketing firm focused on selling personal care products and nutritional supplements. The company has two primary brand lines. Nu Skin consists of personal care products, mainly focused on skin care. Some product examples include moisturizer, suntan lotion, soaps, cosmetics, and so forth. Pharmanex is the nutritional supplements line. Products here include LifePak pill-based supplements (similar to what you'd find at GNC), g3 nutritional fruit juices, weight loss shakes (like Slim-Fast), etc.

Last year, the Nu Skin line accounted for about 55% of sales, and Pharmanex 43%. Over a longer period of time, the breakdown has been about 50/50. Nu Skin is truly a global company. Japan is its largest market at about 30% of sales. China accounts for about 18% of revenue, and both the U.S. and South Korea 15%.

You won't find Nu Skin products in your local grocery store. This is a direct marketing (or "network marketing" or "multi-level marketing/MLM") firm, with products only available through individual distributors. Most are probably familiar with Avon (AVP) or Amway, which have similar business models (and in some products are direct competitors to NUS). Individuals start their own Nu Skin distribution business, which can be expanded by recruiting new people to be distributors under them.

Nu Skin has more than 761,000 active distributors worldwide. While that figure has been pretty much flat over the past three years, the number of "executive distributors" has increased about 10%. Executive distributors are those that have built large networks and sales volumes.

While many (including myself) have been skeptical of MLM companies, a few things caught my eye on NUS. First, they do not pay recruitment bonuses -- only commissions on sub-distributor sales. Second, the company's culture is not focused on signing up new distributors at any cost. This limits the "churn and burn" aspect that is the major turn-off against more aggressive firms. Additionally, NUS averages a 42% commission payout on sales, one of the highest of any MLM.

One other thing on MLMs -- they have been good choices out of the Magic Formula Investing (MFI) screen. HerbalLife (HLF) is up an impressive 267% since appearing in MFI in April of 2009. Avon is up more than 70% since appearing in February of 2009. Pre-Paid Legal (PPD) is up 35% in the past year. The very low cost of the MLM business model makes it a highly efficient way to market and distribute product.

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