We started with the list of 32 companies from the non-cyclical sector that recently landed on at least one Reuters Select stock screen. To refine our search, we focused on certain criteria on the scoring worksheet portion of the downloadable Weekly Reuters Select Excel spreadsheet console, starting with valuation. Since we don't want a stock with a high price tag, we emphasized low price to earnings (P/E) and P/Sales ratios relative to the industry average. As indicated below, USANA is trading at a discount to the average of its peers in the personal & household products industry by these metrics, but is priced at a premium according to others.
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The key characteristic of non-cyclical companies is that they are relatively immune from the ebbs and flows of economic cycles, and this is, or at least should be, reflected in their stock performance. Consider the beta figures above. Beta is a measure of volatility and tells us roughly how sensitive a stock is to fluctuations in the overall market, which we define as the S&P 500 Index. A beta of 1.00 means that a stock moves in line with the S&P 500 index. If the index goes up by 5 percent, the stock should also go up by 5 percent. Higher betas mean that stocks move more than the market, while lower betas indicate that stocks move less, and, as betas get closer to zero, stock movements have less to do with the performance of the market. The average beta for the non-cyclicals sector is 0.42. By comparison, USANA stock has a beta of -0.48, suggesting that it moves slightly in the opposite direction of the overall market.
On the worksheet, we also emphasized indications of superior rates of management effectiveness, as measured by return on investment [ROI]. ROI measures management's ability to effectively generate net income with available capital; it is calculated as net income divided by shareholder equity, long-term debt and other long-term liabilities. As indicated below, USANA's ROI has not only improved in the trailing 12-month [TTM] period from its five-year norm, but it has also increased its lead relative to its peers.
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These superior ROI figures not only helped USANA achieve one of the highest scores among consumer non-cyclical companies on the scoring worksheet, but also enabled the company to land on the Return On Investment screen. The screen begins by requiring that a company's ROI must be at least 20 percent higher than the industry mean over both the TTM and five-year periods, and USANA easily clears this hurdle. Further, to appear on this screen, a company's TTM ROI must be at least 20 percent greater than its own five-year figure; USANA's more-recent result is about 45 percent higher than its longer-term number.
The solid ROI figures stem at least partially from fast earnings improvement, which is reflected in the company's superior earnings-per-share [EPS] growth rates over the most recent quarter [MRQ], TTM and five-year periods.
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As very fast growth rates are unsustainable over long periods, it is unrealistic to assume that the company's five-year EPS growth rate will continue, and, indeed, the pace of improvement has started to ease to more sustainable levels, as we see in the MRQ and TTM figures.
Still, we want some indication that the company is not going to experience any substantial deterioration in its business anytime soon. For this, we turn to analyst estimates. The screen requires that the current consensus estimate for EPS this year must not have been reduced over the last eight weeks. In looking at USANA, we find that analysts have slightly raised their estimates for both this year and next. Over the last two months, the consensus EPS estimate for 2006 has inched from $2.18 to $2.19, while the consensus for 2007 has also edged higher, from $2.59 to $2.60.
At the time of publication, Erik Dellith did not directly own puts or calls or shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.
Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.