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Nature's Sunshine Could Be the Next Big Thing: Opinion

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( MagicDiligence.com) -- Nature's Sunshine (NATR) is a direct selling, multi-level marketing firm. Herbal products account for about half of sales, including remedies for better circulation (Cardio Assurance), blood pressure (Blood Pressurex), and immune system function (Liquid Chlorophyll). Vitamins, minerals and supplements comprise another 43% of sales, catering to a wide variety of both general and targeted outcomes. Personal care, including skin and hair products, round out the portfolio. Nature's Sunshine is an international firm, with 45% of sales originating outside of the United States.

Multi-level marketing companies are nothing new to Magic Formula® Investing, or MFI. The direct marketing model involves individuals (known as distributors) recruiting additional distributors to buy and market products, and to recruit further distributors to build out a network. Essentially, this is a low-cost way to build both an advertising and distribution network, leading to high returns on capital.

The downside is that turnover is very high (over 55% of NATR's distributors do not renew), government regulations can be restrictive and both the general public and investing community have a less-than-positive view of the business model. Let's face it, being hounded to buy (and then sell) stuff by a relative or friend is a real pain in the posterior.

That said, the track record of these companies in MFI is pretty stellar. USANA Health Sciences (USNA), probably Nature's Sunshine's closest analog, is up 40% since it appeared in the screen last fall. Herbalife (HLF), Nu Skin (NUS) and Pre-Paid Legal (PPD) all more than doubled after appearing in MFI. Can Nature's Sunshine be the next success story?

I believe it can. Since new management came on board in 2010, the firm has dramatically improved its cost structure, cutting poorly designed promotional programs, eliminating unnecessary overhead and terminating an unprofitable collaboration with NutriPlus LLC. Since then, operating margins have climbed to more than 10%, from prior hideous levels under 4%.

Its main public competitors (USNA, NUS and HLF) carry operating margins around 13%, so there are probably a few points of improvement still possible here. This is the first step of the turnaround, and it is well under way.

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