This is part three of a multi-part series on USANA Health Sciences, Inc. (NYSE:USNA). See part one and part two here.

USANA

USANA valuation

Continued from part two: Without even looking at USANA Health Sciences, Inc. (NYSE:USNA)’s valuation, the company has many attractive qualities. Nevertheless, valuation is important and USANA’s valuation is attractive for many different reasons. Firstly, it would appear that USANA is undervalued when compared to the rest of its sector. For example, for full-year 2013, USANA is expected to earn $5.36 per share, analysts then expect the company to earn $5.75 per share for fiscal 2014. This means that USANA is trading at a P/E of 13.4 for 2013, falling to 12.5 for 2014. Both of these earnings multiples are below USANA’s sector average of 19.8.

Secondly, if we factor in USANA Health Sciences, Inc. (NYSE:USNA)’s cash balance, the above earnings multiples drop further. According to the company’s last reported fiscal quarter, cash is currently worth $8.30 per share; as a result, after discounting cash, USANA’s 2013 and 2014 P/E’s drop to 11.9 and 11.1 respectively. With USANA generating close to $20 million in cash per quarter, these multiples are likely to fall further.

A forward P/E of 11.4 is without a doubt, cheap. Indeed, you would expect a company such as USANA Health Sciences, Inc. (NYSE:USNA), which is highly cash generative and buying back stock with cash on hand, to trade at an earnings multiple in the high-teens at least.

USANA’s price-to-free-cash-flow

Furthermore, USANA’s price-to-free-cash-flow, or P/FCF multiple is equally attractive. For instance, on a TTM basis, USANA Health Sciences, Inc. (NYSE:USNA)’s trades at a P/FCF multiple of 11.5. Now, the most cash generative company in the world, Philip Morris International Inc. (NYSE:PM) currently trades at a P/FCF multiple of 50, while other FCF giants such as Mastercard Inc (NYSE:MA), Pfizer Inc. (NYSE:PFE) and The Coca-Cola Company (NYSE:KO), all trade at P/FCF multiples of at least 20 or greater. Not forgetting that USANA sits in the healthcare sector, a sector that is best known for its cash generation and currently trades at an average P/FCF ratio of 30, based on the sectors 20 largest companies. So, it would appear that investors are seriously undervaluing USANA’s cash generation. FCF/EV and FCF/Market Cap figures are forecast at 7% and 6.5% respectively for 2014.

Still, USANA Health Sciences, Inc. (NYSE:USNA) is not what many would consider to be a conventional value investment. Book value per share is forecast to be $18.1 for full-year 2013, implying that the company is currently trading at a P/B of just under 4x. And, using the rudimentary Graham number to place a value on the shares, we get an indicative Graham price of $46.72, implying that the stock does not have the ‘margin of safety’ usually required by value investors.

Having said that, using a more Buffett-esque method of value investing, USANA Health Sciences, Inc. (NYSE:USNA)’s value becomes more apparent. For example, since the end of fiscal 2009 to the end of fiscal Q3 2013, USANA’s book value per share has expanded 700%. Meanwhile, over the period 2009 to 2012, USANA’s annual EBIT has doubled and net profit is up 120%, EPS have expanded 140%. All in all, if this performance continues, even at a rate half of what it has been for the past four years, USANA’s EPS will have expanded 70% again within the next four years, leaving the door open a near doubling of the share price, if the valuation remains low.

Nevertheless, there are headwinds facing the company and I shall cover them in the final part of this series.