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Summary

  • Herbalife stock cannot escape a cloud of uncertainty until the FTC probe is revolved.
  • Other multi-level marketing stocks that sell similar products may be beneficiaries.
  • Nu Skin and USANA Health may be the top alternatives to Herbalife, with Nu Skin getting the nod.

Herbalife (NYSE:HLF) is likely dead money until the Federal Trade Commission (FTC) reaches an outcome in the civil probe it announced this week into the nutritional supplement maker's business. Herbalife rivals now have a chance to shine.

There is no timetable for the FTC probe, thus no way to know when to look at the Herbalife stock again as a potential investment, or whether to hold its shares. The company has long been in the cross-hairs of short-seller Bill Ackman, who claims the company's multi-level marketing practices amount to an illegal pyramid scheme.

Whether there is merit to the accusations matters perhaps less to the share price at the moment than the fact there is no way for Herbalife to escape from the cloud of an official inquiry until there is an outcome.

Herbalife, for its part, vehemently disputes Ackman's accusation of illegal activities, and says it welcomes the government inquiry on account of the "tremendous amount of misinformation" that has been spewed in its direction.

Herbalife actually has several publicly traded rivals that closely follow a similar business model with similar products. Herbalife is a nutritional supplements and personal care products company that utilizes multi-level marketing, which in itself is not an illegal business practice.

In multi-level marketing, a company's salespeople are compensated not only for sales they personally generate, but also for the sales of other salespeople that they recruit. In an illegal pyramid scheme company, the commissions paid for recruiting new salespeople exceed the revenues made from selling the products or services of the company - thus the company can collapse when no new salespeople can be found.

Herbalife and others in the multi-level marketing game are quick to maintain their focus is on selling reputable goods or services.

Who else follows a similar model? To name a few, Nu Skin Enterprises (NYSE:NUS), USANA Health Services (NYSE:USNA), Mannatech (NASDAQ:MTEX), and LifeVantage (NASDAQ:LFVN).

In addition to their multi-level marketing components, all of these companies, just like Herbalife, sell nutritional supplements and personal care products.

It is logical now for all of these companies to pursue market share, to step up recruitment of salespeople, and to intensify sales and distribution of their similar products while Herbalife is preoccupied. It is unclear whether clients and suppliers will stay loyal to Herbalife, or whether Herbalife's brand has been damaged.

Herbalife is the largest of the group, with a $6.6 billion market cap. The next most formidable with a $4.4 billion market cap, is Nu Skin, which actually rose 6 percent while Herbalife stock was declining a similar amount after the FTC news came out.

There is optimism, including from analysts at Wedbush Securities, that Chinese authorities will end a separate investigation into Nu Skin business practices on a positive note, and heavy call buying occurred in Nu Skin stock even as Herbalife was skidding downward. This suggests a good deal of investor confidence about Nu Skin's prospects.

USANA Health is a respectable third with a $1.08 market cap, and the latter two, LifeVantage and Mannatech, are small caps that would have trouble mounting a real challenge to Herbalife's dominance even as they try to chip away from below.

All three at the top of pile - Herbalife, Nu Skin and USANA Health - are down sharply in 2014, but are still up considerably over the past 52 weeks on their stellar respective growth. Over the past year, Herbalife stock is up 62 percent, Nu Skin up even more at 70 percent, and USANA is up 55 percent.

There appears to be value in all three - they have similar P/E's: Herbalife at 13.32, Nu Skin at 12.37 and USANA at 13.09.

On earnings growth, Nu Skin is the real standout, with EPS/TTM of +68.75 percent, versus +24.30 percent for Herbalife and +24.89 for USANA.

Looking ahead, consensus EPS growth for the next 12 months is similar for all three, pegged at +12.66 percent for Nu Skin, +15.89 percent for Herbalife and +15.56 percent for USANA.

Revenue growth is another area where Nu Skin has been outshining the others over the past year - at +46.42 percent, versus +18.49 for Herbalife and only +10.71 for USANA.

From a value standpoint, Herbalife comes up distinctly short in consideration of price-to-book ratio - 15.19 versus 5.92 for Nu Skin and 4.3 for USANA.

USANA is clearly the junior of the three. It pays no dividend, versus 1.7 percent for Nu Skin and 1.84 percent for Herbalife. It also has relatively weak institutional sponsorship compared to the other two, and a fraction of the liquidity - USANA trades less than 10 percent of the shares that the other two trade on a daily basis.

CONCLUSION

Nu Skin is well positioned to continue its growth while Herbalife awaits the outcome of a federal inquiry. Nu Skin has been growing profits and revenues more quickly than its rivals and is well valued. Heavy call buying in Nu Skin stock and its upward thrust at the same time Herbalife stock falls suggests a good deal of investor optimism that a Chinese investigation will end well. Herbalife's prospects are murky while it is under investigation. USANA is a junior competitor that, while having clear growth prospects, is not yet on equal footing with its larger rivals. Of the three stocks, Nu Skin is the best choice for an investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Herbalife Is Dead Money, But Rivals Nu Skin And USANA May Be Ready To Rock