Ramey Defends HLF, NUS, USNA; Does Not Foresee China Issue


Timothy S. Ramey of D. A. Davidson & Co., the famous HLF bull, provides a multi-level marketers industry update regarding the latest news out of China. Excerpt from the report below.

China matters. For the most recent quarter, Greater China accounted for 50% of Nu Skin’s sales; for USANA Health Sciences, Inc. (NYSE:USNA), Greater China was 34.4% of sales; Herbalife Ltd. (NYSE:HLF) reports China sales were 11.3% of total. Perhaps just as important, China has been a big contributor to growth for all three companies.

Nu Skin shares plunge

Direct selling practices in question. Nu Skin Enterprises, Inc. (NYSE:NUS) shares plunged 15.6% on January 15th in reaction to an article in the People’s Daily newspaper of China. The article attacked the company’s aggressive direct selling practices in China and accused distributors of “brainwashing.” It also made claims distributors were selling more types of products than are allowed by Chinese regulators. We didn’t see anything surprising coming out of the article and many of the claims appear to be unsubstantiated. Nu Skin responded to the article by saying it contains inaccuracies and exaggerations that are not representative of its business in China. Today, Chinese officials announced they would open an investigation into the pyramid scheme allegations referred to in the article

We think about the allegations that hit Mead-Johnson (MJN*-NEUTRAL- $83.55) last summer over aggressive pricing and purported payments to doctors to endorse MJN formulas. This news, too, was disruptive since MJN derives 52% of sales from Asia and the majority of that is China. Ultimately, the company paid a $33.4 million administrative review penalty, addressed regulatory concerns and moved on. Did it slow the growth? Probably. Did it derail the strategy? Not at all.

On the facts of the matter we don’t believe the companies we follow that operate in China are illegal operations, but some who know more about China than we do have suggested that disputing the facts is not a productive reaction to Chinese regulators. It may well be that the “I’m sorry, how much is the fine, let’s move on” defense is the most likely outcome.

We don’t envision existential risk for the three MLMs in our coverage with respect to China. Even under the prior administrative review that China conducted, they froze the issuance of new licenses but left the major market participants intact. New rules were promulgated but none of the major operators were forced to close operations.

Exaggerated claims for income or product efficacy? The MLMs in our universe are extremely careful not to make unsubstantiated claims at the corporate level. However, it is difficult to police the thousands, or hundreds of thousands of distributors. Compliance is very important and this will certainly be a compliance/disciplinary issue. We don’t see structural deficiencies in their model. China is becoming an increasingly important market to these MLMs. Nu Skin Enterprises, Inc. (NYSE:NUS) is particularly sensitive to this article as China is where it derives half of its sales.

Data as of 12/31/13 indicates short interest in our MLM names has been mixed; see Exhibit 2. Compared to the prior month data as of 11/29/13, Herbalife Ltd. (NYSE:HLF)’s short interest fell 7.0% to 18.3% of shares outstanding, Nu Skin Enterprises, Inc. (NYSE:NUS)’s short interest grew 15.6% to 2.7% of shares outstanding, and USANA Health Sciences, Inc. (NYSE:USNA)’s short interest fell 3.4% to 13.1% of shares outstanding.

HLF and Nu Skin are extremely attractive

We continue to believe Herbalife Ltd. (NYSE:HLF) and Nu Skin Enterprises, Inc. (NYSE:NUS) are extremely attractive. The “China” story may well make trading volatile (we’re used to that) but the underlying fundamentals are strong. Herbalife Ltd. (NYSE:HLF) is 13.8x 2014 EPS and 8.6x EV/EBITDA; Nu Skin is 11.4x EPS and 9.0x EV/EBITDA; USANA is 10.1x EPS and 9.0x EV/EBITDA. In our opinion, these valuation ranges are extremely low for high-growth stocks with such tremendous upside. We reiterate our BUY ratings on Herbalife Ltd. (NYSE:HLF) and Nu Skin and our NEUTRAL rating on USANA

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