- Market over-reaction leaves Nu Skin trading at <60% of fair value.
- We forecast growth of over 10%.
- Reasonable dividends prove a good income stream.
- Economic moat has both depth and width and continues to increase.
January 16th-21st, 2014 saw Nu Skin (NYSE:NUS) setting up as the perfect long-term value play. China's State Administration for Industry and Commerce ordered local authorities to investigate media reports that alleged NU Skin Enterprises distributed false information and conducted illegal business in China, causing the share price to tumble $40+ (a full 30%) and practically bump straight into our consider buy price.
Our STRIDE ratings for the company were already pretty good with only intrinsic value suffering before the drop in price, but once the news hit, and the share price plunged, that was quickly rectified.
STRIDE scores for NU Skin
So, the only question left was "Is there any real danger from this investigation in China?"
Well, there was no easy way for us to determine this, so we thought we'd adopt a wait-and-see approach and let the authorities conduct and conclude their investigation.
The investigation by Chinese authorities
On the 24th of March, it was announced that Nu Skin did not break any major laws and that it would only pay two, reasonably small fines. The company was ordered to pay $524,000 for products that were not permitted to be sold by independent distributors - these products were not approved for their direct channel. A further, $16,000 fine was issued for unclear information relating to products.
Given that this equates to less that $0.01 per share, it's no surprise that the share price rallied an immediate 18%. Unfortunately, due to this, our Timing engine no longer had the business as weak, so we had to exercise further patience - which we are always happy to do.
We felt the lead up to the May earnings report may offer some weakness in the share price and provide the opportunity we were waiting for.
The May quarterly report
Unsurprisingly for us, year-on-year revenue growth was reported at 24%, according to the company's May 6th quarterly report, and EPS growth was reported at 17%, roughly in line with our view of the EPS figures and their growth.
The business reported 16.5% growth in STRIDE EPS on a TTM basis and is steaming ahead in emerging markets.
Given that we had forecast 12% growth, we were happy to see they had easily outperformed this.
The Bank of America downgrade
Friday, the 18th of July saw Bank of America downgrade Nu Skin from neutral to downgrade and cut its price target to $63. Citing difficult times in China and bad sentiment towards the business model, they forecast EPS of $5.25 for the full year, well below our view of full year EPS. Personally, I'm quite thankful for this as it has provided an even better opportunity to buy this business.
The STRIDE picture ahead
The STRIDE view of Nu Skin
So, we are happily long on Nu Skin as of this week. The main cases are:
1. All fundamentals stack up
2. Timing is great
3. They are well under our consider buy price
4. We are forecasting double digit growth
5. They have depth and width in moat (and it's growing)
We find it truly amazing that Nu Skin still languishes, but are happy with the buying opportunity this presents us. The business has great potential for growth, particularly in emerging markets, has a growing dividend yield and - by our valuation engine - is massively undervalued.LaVladina via photopin cc