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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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