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Nu Skin enterprises (NYSE:NUS) is a global direct selling company distributing anti-aging personal care products and nutritional supplements under its Nu Skin and Pharmanex brands. In this article, I will attempt to convince you why Nu Skin is a great long term hold.

Good long term profitability

A fast moving consumer goods direct selling business like Nu Skin can be compared to a restaurant where the higher the turnover, the better the business is. Margins are still important though, but in this case, it only needs to be at an appropriate level.

Without other marketing avenues besides its distributors, a direct selling business's only route to convince customers to switch from more mainstream brands to theirs is through great product quality and effectiveness. Of which, can be demonstrated through the improvement in the distributor's life. A good gauge for the quality of the product can be seen through the number of distributors for the product. A good product is able attract users as well as sellers (people who are looking for additional income sources) captivated by the high expected demand for the product. For the past 3 years, the number of distributors around the world under Nu Skin grew an average of 9% per year to 946000 while Avon products (NYSE:AVP), its closest competitor, saw its distributors shrink by 1.25% per year. With such growth in the demand for the company's products, it can be safe for us to say that margins can either be maintained or improved.

Also, ladies around the world, who have been the largest consumer of anti-aging products, have seen their wages rise consistently and rapidly over the past decade. Wage increments give them purchasing power to purchase more anti-aging products and at a higher price.

Good long term business volume

In this business, it is important to make sure that the distributors focus more on sales instead of building their down lines. If not, most distributors will just keep building down lines and nothing would be sold. In the case for Nu Skin, the senior management have decreed that all distributors for the company has to fulfill a certain sales quota per month or they will risk not receiving any commissions they have earned, including those from their down lines. Consequently, many distributors would purchase their full sales quota with money out of their own pockets first before attempting to sell the product. In this way, Nu Skin can establish stable revenues while concentrating on how to further expand the size of their distributor base.

Moreover, switching costs are being built up the longer distributors stay in the system. The down lines and the commission stream the distributors painstakingly build up make it very hard for them to leave. This buys the company time to solicit feedback from its wide range of distributors and allows them produce products which meets the demands of their distributors as well as prospective customers.

In fact, this is one main of the reasons why Nu Skin is able to survive in an industry characterized by intense rivalry and dominated by brands like Olay, L'Oreal and Neutrogena. Especially, when complexion is of paramount importance to all ladies and they are only willing to purchase brands that have shown credibility.

Besides, as the population around the world ages, demand for anti-aging and nutritional supplements will sky rocket. The current aging generation has been brought up with the mindset to live life to the fullest; to live youthfully no matter what their ages are. Such mindset has thus extended to them being concerned about their looks as well.

Furthermore, personal care is becoming a lifestyle choice of many people. In order to live an energetic and youthful life, many are dabbling in activities and products which rejuvenate and slow down the aging process.

Financial ratios

To further convince you why Nu Skin is a good long term hold, it would be good take a look at some of its financial ratios.

 

03 to 07

08 to 12

Ave. ROE

19.98%

28.28%

Ave. Return on capital

19.15%

31.65%

Ave. Net margin

5.82%

8.49%

Ave. Asset Turnover

1.87

1.88

Ave. Debt to Equity

0.95

0.77

Annualized earnings growth

-6.52%

32.49%

As mentioned above, in the FMCG business, it is important to have high asset turnovers while maintaining appropriate levels of margins. So, as can be seen from the table above, Nu Skin has shown very strong and resilient asset turnover and net margin ratios in the 2 periods. What's more, ROE, ROC and earnings growth have improved considerably over the 2 periods compared.

Nu Skin VS Competitors

Using the same ratios, I have pieced together financial results of Nu Skin and its competitors, Avon products and Herbalife (NYSE:HLF), from 2008 to 2012 in the table below.

 

NUS

AVP

HLF

Ave. ROE

28.28%

53.50%

90.16%

Ave. Return on capital

31.65%

25.35%

72.69%

Ave. Net margin

8.49%

5.28%

10.52%

Ave. Asset Turnover

1.88

1.65

2.38

Ave. Debt to Equity

0.77

4.10

2.56

Annualized earnings growth

32.49%

-171.37%

18.33%

Although the table above shows Herbalife to be better in many ways as compared to Nu Skin, I would, however, prefer to stay away from HLF due to its over leveraged balance sheet.

Conclusion

A strong competitor with good fundamentals as well as good long term trends makes Nu Skin a very good long term hold.

I have valued the company to be at approximately $75.80 versus its current price of $59.09 (at 8th June 2013), making the current price a very attractive entry point.

Source: Nu Skin Enterprises: A Great Long-Term Hold For Investors