Last close: $25.22
There is no reason for the Market’s current view on USNA’s valuation.
USNA sells nutritional and personal care products using multi-level marketing. Larger companies using similar business model are Amway and Herbalife (NYSE:HLF).
(Personal views on multi-level marketing may be polarized. This analysis ignores criticisms directed at the network marketing business model relying on this type of marketing’s long and successful operating record to assume that it is, at a minimum, lawful.)
Since 1995, USNA delivered annualized sales growth of 21%. In this period, it experienced sales decline in only two years (2000 and 2001) and maintained positive sales growth - albeit at a lower rate - through 2009 and 2010.
- USNA operates in North America and Asia, a region which now contributes 53% of sales
- Between 2006 and 2011, all of USNA’s sales growth came from Asia (18% CAGR over 5 years) - driven by China (32%) - while the North American business remained broadly flat
Cyclically adjusted profits and returns have remained strong throughout.
- 77% gross margin, on average since 1996 and 82% currently (2011)
- 15% average EBITDA margin and 15% currently
- 30% average return on assets and 28% currently
- 45% average return on capital and 39% currently
- 55% average return on equity and 41% currently
USNA’s cash generation (defined as cash flow from operations less capital expenditure) is very strong. In the last 10 years, USNA converted 63% of EBITDA in to free cash on average (77% in LTM to July 2011).
Founder and management’s aforementioned track record and 54% ownership provides comfort when placing reliance on USNA’s business continuity.
Yet, despite these positives and increased current year guidance, USNA’s share price has underperformed S&P 500 by c. 48% and Herbalife by c. 136% in the last year. The Market is clearly underwhelmed by USNA’s prospects both on an absolute and relative basis when it values USNA at:
- 4x LTM EBITDA and c. 8x LTM P/ E, which is both approaching its lowest valuation historically and a significant discount to Herbalife
- 9% free cash flow yield, based on (absolute) free cash generated on average in the last 10 years (19% LTM yield)
Such indifference by the Market for a company with no debt! (USNA had $27 m net cash position as of July 2011.)
It is difficult to objectively understand Mr. Market’s yardstick to value USNA. (Perhaps another customer for USNA’s vitamin and mineral supplements?)
