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
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV