Superior Earnings Growth Makes USANA Health Sciences Attractive

The Federal Reserve's measure of industrial production rose less than economists expected in July, providing further evidence that the central bank's interest-rate hikes since June 2004 are working to ease growth. Investors, then, might do well to consider industries that are better shielded from a slowly growing economy. Our search for stocks from the consumer non-cyclical sector brought us to nutritional-supplement and skin-care company USANA Health Sciences Inc. (USNA) on the Reuters Select stock screen for Return On Investment.

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.

Learn about Valuation Ratios

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.

Learn about Management Effectiveness

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.

Learn about Growth Rate Ratios

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.

Comments

[terrihamel1:]

USANA: Straight Up

If you're not aware of the recent 'controversy' surrounding USANA Health Sciences, you've been missing an interesting series of articles. I am writing here as someone who has been taking the products for nearly a decade, so I'm not unbiased. I've recovered my costs in marketing USANA vitamins to friends and family, but have yet to make a serious stab at the business. I don't know if having consumed their products is supposed to disqualify me from making comments or asking questions, but I'm going to take a stab at it anyway. In spite of the fact that I'm not a stock analyst, self-proclaimed or otherwise, I'd like to share my perspective from an 'inside' point of view. I'll keep it simple, so even the most intelligent can grasp it. Don't look for technical brilliance, but I think it's a story worth hearing.

I'm a teacher. If you know anything about schools, they're germ factories. For a variety of reasons, genetic and otherwise, I've never had a strong constitution. Plainly put, I used to catch everything the kids brought into the building, and then some. One day I was visiting my older sister, and noticed a product catalog for a nutritional supplementation company sitting on her coffee table. Everything in it was footnoted and referenced back to long-term, placebo-controlled, double-blind studies published in mainstream medical journals. Having completed six years of university, I was curious, and asked her about it. She told me flat out that the people next door, who had left her the catalog, were pushing a pyramid scheme. I nodded knowingly, having no idea what that was supposed to be, waited until they left the house, hightailed it over to the neighbors' place and banged on the door.

They were happy to see me (you probably guessed that already). I sat down with them for over an hour as they told me their story. Their daughter had been suffering from a certain health problem that traditional medicine hadn't been able to help. Someone told them about the products. Their daughter took them and, over the course of several months, her health dramatically improved. Causation or correlation? I didn't care. What was there to lose? Not my health, that was for sure. There was one catch, however. These people wouldn't sell me any product. They wanted me to sign up with them in their business.

Big mistake. I've since learned that this goes against on of the most important aspects of building a network marketing business, which is to have a solid base of preferred customers (these people were not following the company's compliance protocol: USANA is relentless in emphasizing the importance of bringing in loyal product users. I wanted the product badly enough, however, that I signed up with them to get my initial order. Once it arrived, I quit... but I had my vitamins).

Within a matter of weeks, taking the product religiously, I experienced a profound change in my health. Colds didn't seem to stick. I slept better and had more energy. Did taking the product cause, or merely correlate with, the changes in my health? Who cared? All I knew was that I wasn't getting sick all the time.

Then I ran out of vitamins. Not only did I run out but, before too long, I was catching colds again. Seriously. By this time, I'd twigged onto the fact that ordinary people could actually sell this stuff. Now I was curious about the whole enchilada. I somehow ended up in Vancouver, British Columbia at a marketing seminar led by one Michael Oliver (google away for more). I sat in the back of the room with a bucket of school assignments and starting grading them as he began to speak. Fifteen minutes later I put up my hand and told the group that I was putting the bucket away. I'm sure there were people in the room who thought I was a plant. The fact was that his seminar was complete devoid of hype. I'm proud to say that Michael Oliver eventually became a deeply respected friend, but that's another story.

Six months later, I chose a different person with whom to sign up. Any teacher can explain why I never did get around to building much of a business. Evenings and weekends were recovery time. I loved my job, as well as my students, but I simply didn't have time for anything else. Ironically, I now realize that, during those years of taking the product each month but doing little to sell it, I was one of thousands who were dragging down the company's distributor earnings ratio. You see, I qualified as an associate but, as far as USANA's computers knew, I might as well have been out there trying to build a business and failing miserably (if it was truly a pyramid scheme, I might have been raking in some money simply through my position on the totem pole). The truth was that I wasn't getting paid (much) because I wasn't doing the business (much).

Last year I moved from Canada to the United States, having met (at the 1999 USANA convention, of all places) and married the man who became my best friend, a wonderful American whose story closely parallels mine. I've recently been training with some of the most successful people in USANA (it's free, and available to all associates), and I'm planning on giving the business a serious go this time. But I'm under no illusions that anyone's going to do this for me. "If it's to be, it's up to me." (I understand that some people, having ignored USANA's Business Development System and tried to reinvent the wheel, haven't done so well and are now jumping on the lawsuit bandwagon).

One thing: I've yet to read a posting where one of your analysts, citing the allegations of Barry Minkow (a convicted felon, no less) has approached USANA's founder, Dr. Myron Wentz, for his response to such allegations as, for example, the alleged inaccuracies in product labeling. It's curious, given that Dr. Wentz's ongoing work continues to be published in mainstream medical journals, that your commentators are relying on the words of a convicted felon rather than going to the source and asking for documentation. That would require a bit more work, but don't you think it makes sense (particularly when you learn that USANA is affiliated with the Linus Pauling Institute, that Dr. Wentz just picked up the Albert Einstein award in Jerusalem, and that the company has garnered numerous other accolades of which they could rightfully boast)?

But then, I'm not a stock analyst. Nonetheless, I still think a teacher should be allowed to express an opinion. And stories are the backbone of life.

Terri

CatchingWaves@excite.c...

2007 Jun 29 07:05 PM