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

The second step will be to re-ignite revenue growth. Sales growth here has been lukewarm, to say the least. Sales remain about the same as 2007 levels. Europe and Asia/Pacific have been growing at 15% rates, while the Americas remain flat, a trend that will probably continue. While Nature's has operations in 51 countries, there remains room to grow.

China remains untapped, a market behind much of Herbalife's success. India is also virgin territory. I see some additional large markets in Europe that could be entered, including France and Belgium. Over the long run, there are plenty of possibilities for growth here. It will be a matter of execution.

Failure to execute on the growth and margin opportunities is the biggest risk here, and it is a big one, as the industry is crowded with larger and more well-known companies and brands. Nature's Sunshine has historically been a second-rate player. This leaves the company vulnerable to competitors poaching its top distributors and their networks. I believe that, over the long run, NATR will need to raise its volume incentive payouts to more than 40% of sales (from about 36% today), closer to what the competition pays.

Also, cash flows have been spotty. Over the past five years, the firm has converted an alarmingly low 17.4% of reported operating earnings to free cash flow, far below the 75%-80% average for the industry. This is something to keep a close eye on, as it often signals irregularities in accounting, inventory management, or tax accrual payments.

Assuming modest growth, the firm reaching a 12% operating margin, and a slightly below-industry earnings multiple, I see Nature's Sunshine being worth $26 a share, about 52% above the current price of $17. The stock is on a good run right now and there should be continued upside going forward, but it is too similar to current pick USANA Health Sciences to add to the Top Buys list .

Steve owns no position in any stocks discussed in this article.

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