Nu Skin Enterprises, Inc. (NUS) bulls have been maintaining that the second half of this year will bring strong recovery for the China-based multi-level marketing company. However, economic factors may prevent that from being the case. Aside from the huge problems with the Chinese stock market, the company could also be negatively impact by the Middle East Respiratory Syndrome (MERS) outbreak in parts of Asia.
Nu Skin price target cut
In a report dated July 9, JPMorgan analysts John Faucher, Sofya Tsinis and Peter Grom said they slashed their price target for Nu Skin Enterprises, Inc. from $60 to $49 per share. Their price target cut follows an increase in February. They also cut their earnings per share estimates for this year and next year by about 4% because of expected negative impacts from China’s problems and the MERS outbreak.
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The analysts point out that Wall Street has not yet cut its numbers for Nu Skin but also that the stock has underperformed the S&P 500 Index and the Consumer Staples Select Sector SPDR Fund. They believe that the underperformance will limit the recovery bulls have been expecting in the second half of this year.
Nu Skin exposed to South Korea
One of the hardest-hit areas with MERS is South Korea, and the JPMorgan team reported that Nu Skin is has the biggest direct exposure to the country of all the stocks under their coverage. The multi-level marketing company reported that South Korea made up 18% of its revenues last year and 20% in the first quarter of this year.
The analysts don’t expect Nu Skin’s South Korea business to grind to a halt because they think a good portion of the business is done online. However, they do expect some negative impact. They’re expecting a decline of between 17% and 18% on the top line in the second quarter for South Korea.
For the third quarter, they’re expecting an 18% decline. Overall, they’re projecting a decline of 8% to 9% for the full year compared to their previous estimate of about 1%.
Nu Skin still dealing with currency issues
Like every global company, Nu Skin is also being hit by currency headwinds. For this year, the JPMorgan team expects the negative impact to be about 1 basis point worse than they previously thought, with most of the negative impact coming in the third and fourth quarters.
They note that the South Korean won is having the biggest negative impact because it has declined in value by almost 5% in the last couple of months. Overall this year, they expect about an 8% negative impact from currencies, which is slightly worse than Nu Skin’s expectation of a 7% negative impact.
What about China?
Even before China’s stock market started to tumble, Nu Skin was already having problems there. In the first quarter, Mainland sales slumped 13% quarter over quarter and 37% year over year. The number of executive distributors declined 28% year over year and 8% quarter over quarter. Because of these declines, the JPMorgan team stated that the picture of recovery in China is “blurrier” now.
They also said, however, that the Chinese macro environment is a bigger concern for Nu Skin as the government tries to artificially prop up stock prices there. The analysts expect China’s problems to present a barrier for Nu Skin’s recovery in the second half of the year because Mainland China was about 26% of sales last year and 25% in the first quarter of this year. They’re now expecting a 6% year over year decline in China sales for the second quarter, compared to management’s guide for flat year over year sales.
As of this writing, shares of Nu Skin were up 1.3% at $43.78 per share.