USANA Health Sciences [Part 2]: Prudent, Impressive Management

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

Continued from part one: USANA Health Sciences, Inc. (NYSE:USNA)’s MLM business model and low cost of product means that the company does not require a high capital outlay, as the most expensive part of any business, staff, brick and mortar stores and distribution, is, for the most part taken care of by the company’s representatives.

USANA Health’s financials

In particular, according to my figures USANA Health Sciences, Inc. (NYSE:USNA)’s ROIC for the last 12 months was 37% and the company’s return on assets was 26% – these levels of return are more indicative of a technology company. Of course, strong returns on capital and wide EBIT margins usually indicate into strong cash generation and USANA is no different. In addition, USANA need to spend in order to, as most of the company’s sales growth is driven through representatives, who manage their own costs. With low capital spending requirements, and little in the way of depreciation and depletion charges, most of USANA’s profit is translated into cash. For the first nine months of 2013, USANA has generated $65 million in cash from operating activities, free cash flow has been $54 million for the period, that’s around 10% of revenue.

What’s more, USANA Health Sciences, Inc. (NYSE:USNA) has no debt and its cash balance is growing faster than it can spend it. Net cash was up 70% year-on-year at the end of the fiscal third quarter, and was worth around $8.3 per share. With opportunities for growth through acquisitions limited, USANA has been aggressively buying back stock with its excess cash, spending $124 million since 2010 and reducing the company’s number of outstanding shares by around 14% since. Actually, USANA ramped up share repurchases at the end of 2012, authorizing a $50 million buyback during October of 2012 and utilizing almost all of this within the space of two quarters. At the time of the additional authorization during 2012, there was already $14 million of a previous authorization remaining, this indicates the company had $64 million to spend.

USANA expenditures without buybacks

However, according to my data, USANA Health Sciences, Inc. (NYSE:USNA) has only spent $51 million since October 2012 and the company has not repurchased any shares since the first quarter of 2013. Why has the company stopped? Well, since the first quarter of 2013, due to the Ackman/Icahn fight over Herbalife, which has raised the profile of MLM companies around the world, USANA’s stock price has risen by as much as 155%. So, it would appear that USANA’s management have stopped buybacks because they believe that the company’s shares are overpriced, this is indicative of an extremely prudent management team; one that’s working for investors.

If, and I believe I am right in stating this, USANA Health Sciences, Inc. (NYSE:USNA) is appropriately valued now at around $73 per share, then the company was desperately undervalued when it was trading at 2013’s low of $34.70, when management were buying back stock. Management’s decision to buy back stock when they believed that the company’s shares were undervalued and then halting buybacks when they felt the stock was overvalued is fiscal prudence Warren Buffett himself would be proud of.

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