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Nu Skin's (NYSE:NUS) share price has seen a significant correction since the recent news about the Chinese government's investigations into its business practices. Other MLMs including Herbalife (NYSE:HLF), USANA (NYSE:USNA) and LifeVantage (NASDAQ:LFVN) have also seen their stock prices correct, albeit to a lesser extent. A couple of SA contributors/short sellers have started extrapolating what has happened in Nu Skin to Herbalife in their recent articles (see here, here and here).

However, before jumping to conclusions, let us look at the numbers. The following tables show Nu Skin's and Herbalife's Chinese revenues and growth rates.

Nu Skin

Q32013

Q32012

First 9 Months ended 2013

First 9 months ended 2012

Total Revenue

927,612

526,182

2,160,633

1,581,419

YoY Growth

76%

37%

Greater China

464,605

136,633

909,457

428,972

YoY Growth

240%

112%

Rest of World

463,007

389,549

1,251,176

1,152,447

YoY Growth

19%

9%

Herbalife

Q32013

Q32012

First 9 Months ended 2013

First 9 months ended 2012

Total Net Sales

1,213.50

1,016.90

3,556.40

3,013.00

YoY Growth

19%

18%

China

136.7

77.4

323.3

211.4

YoY Growth

77%

53%

Rest of World

1,076.80

939.5

3,233.10

2,801.60

YoY Growth

15%

15%

We can clearly see that Greater China accounts for almost half of Nu Skin's total revenues and was the primary reason for its growth rate being higher than Herbalife and the rest of the MLM industry. On the other hand, China accounts just for 10% of Herbalife's revenue, and while it was growing at a significantly higher rate, this was still below what Nu Skin was witnessing.

One interesting thing to note is that Greater China accounted for just 16% of Nu Skin's revenue till 2009. However, the company became very aggressive in terms of hiring new recruits in China over the last two years - a behavior which usually results in a pop and drop pattern in revenues (see below).

An illustration of pop and drop pattern from a December 2012 presentation by Mr. Bill Ackman.

(click to enlarge)

Bill Ackman criticized Herbalife's pop and drop revenue pattern in his presentation, post which Herbalife became extra careful in its checks to avoid such patterns from occurring. But since there was a lot less scrutiny for Nu Skin's management, they didn't care and what resulted was a massive "pop" in the company's Greater China revenue. It was going to end badly and eventually see a "drop" anyway, but what the Chinese government's action has done is to catalyze this drop.

While Nu Skin's stock price has corrected 47% in the last two days, I believe the company is likely to face a significant headwind going forward as its "pop" reverses and "drop" occurs. Sell-side analysts have a $7.50 EPS estimate (versus company guidance of $7.25-$7.50) for the current year, which is likely to be revised lower. Further, Nu Skin's Q4 EPS will likely be the peak near-term earnings for the company, and it is likely to see a decline in EPS going into the back half of the current year and 2015. Thus, the company should get a lower multiple on whatever downward revised EPS estimates sell-side analysts arrive at for this year.

In terms of valuations, Nu Skin is now trading at 11.3x 2014 consensus EPS estimates, while Herbalife is trading at 12.44x 2014 consensus EPS estimates. Although Nu Skin is trading at a discount, I still recommend avoiding/selling it given its EPS estimates are likely to be revised lower and there is a further downside left from multiple compression as investors realize that 4Q2013 might mark the near-term peak for the company in terms of EPS. Herbalife, on the other hand, has already seen over 10% correction over the last two days and most of the decline is already behind us. The company's 2014 estimates look conservative and sell-side is assuming just 10% growth in the next year, which might prove conservative. Hence, I reiterate my buy rating on Herbalife.

Source: Should Herbalife Investors Be Worried About Nu Skin's Chinese Mess?