It has no debt and is selling at a steep discount to its previous highs, but is Usana Health Sciences Inc. (USNA, Financial) a good value stock for the next five to 10 years? I have to ask because the share price has not recovered since peaking and falling in 2018:
Based in Salt Lake City, Usana is a $1.62 billion developer, manufacturer and seller of "science-based nutritional and personal-care products."
To sell those products, the company mainly uses network marketing, a form of direct sales in which individuals are recruited to buy and sell the products to their own networks of friends, family and acquaintances.
Marketing also includes an association with television host Dr. Oz of "The Dr. Oz Show." Through him, Usana both promotes its products and sells through a direct link to the show's website.
In its 10-Ks for 2018 and 2019, the company disclosed sales in the Americas and Europe region had declined. What growth the company was attracting came from its Asia Pacific region, particularly China.
This chart suggests Asia was able to make up for the shortfall for 2018, but not for 2019:
It also helps explain why the share price went down in 2018 and stayed down in 2019. For 2020, revenue has recovered to some extent, but not enough to turn investors into buyers.
That may be changing, though. The first quarter of this year saw Usana post lower year-over-year figures for revenue and active customers, but higher earnings per share. The second quarter brought positive numbers for all three metrics.
The winning streak continued in the third quarter of 2020 (ending Sept.26) in comparison with results for the same quarter of 2019:
- Net sales increased 14.5% year over year based on what the company called "strong product demand and successful incentive programs."
- Diluted earnings per share grew 32.1%, hitting a record of $1.44 per share.
- Active customers rose 16.5% to another record, 650,000.
Based on those results, Usana raised its full-year guidance for net sales and earnings per share.
Fundamentals
Few companies can boast of rankings this strong:
Given Usana's debt-free status and other strong metrics on the financial strength table, there's not much more an investor might ask of it. At the bottom of this table is the relationship between its return on invested capital and its weighted average cost of capital. The former is high at 37.21%, while the latter (not visible) is just 6.63%. In other words, Usana is earning much more from its capital than it is paying for it.
On the profitability table, we see double-digit margins, producing a return on equity of 33.62; that's higher than 94.44% of its competitors and peers in the "Consumer Packaged Goods" industry (the industry median over the past 10 years is 6%).
Because of disappointing results in 2018 and 2019, the three-year revenue, Ebitda and earnings per share growth rates are depressed, but still positive.
As a producer of health supplements and personal care products, Usana faces significant competition. Its publicly traded competitors include Herbalife Nutrition (HLF, Financial) with a market capitalization of $5.83 billion and Nu Skin Enterprises (NUS, Financial) with a market cap of $2.73 billion. It also lists privately held Amway in its 10-K for 2019.
The company believes it has a moat because of its research and development that leads to higher product quality: it spent $9 million on research and development in 2017, $10.2 million in 2018 and $10.3 million in 2019 and noted:
"Going forward, we expect to continue to increase our spending and resources for R&D to advance our expertise and leadership in cellular nutrition, as well as overall health and wellness. We believe our attention to product quality is a sustainable competitive advantage that also provides a substantial barrier to entry for competitors who wish to enter our space."
In listing its operating strengths, the company cites that emphasis on R&D, as well as in-house manufacturing (quality) and its direct-selling business model.
It does not pay a dividend, but has been buying back some of its shares, posting a three-year average buyback ratio of 4.
Overall, Usana is a quality company recovering from revenue slippage in two previous years.
Valuation
Let's look again at the 10-year price chart:
Obviously, Usana is off the price trajectory of the previous decade and well below the highs it hit in the summer of 2018.
According to the GuruFocus Value chart, it is modestly undervalued:
Its price-earnings ratio is 14.24, well below the 10-year industry median of 19.68 and below its own 10-year median of 15.42.
When we bring growth into the equation, via the five-year Ebitda growth rate, we get a PEG ratio of 1.29, which is above the fair value point of 1.
Because Usana has a high predictability rating, 4 out of 5 stars (and is an Undervalued Predictable stock) we can approach its discounted cash flow valuation with some confidence:
Overall, it seems reasonable to assign a modestly undervalued ranking to Usana. It's true the PEG ratio shows modest overvaluation, but that reflects the company's Ebitda growth.
Gurus
Seven of the investment gurus held positions in Usana at the end of the third quarter. And only one of them, Jim Simons' Renaissance Technologies, held a substantial stake; the firm added 1.48% in the quarter to finish with 1,794,866 shares, good for an 8.53% holding in Usana and representing 0.13% of total assets under management.
Jeremy Grantham (Trades, Portfolio) of GMO LLC has a smaller stake, but he made a major commitment, increasing his holding by 389.84% to finish with 62,700 shares on Sept. 30.
The third-largest holding was that of Hotchkis & Wiley Capital Management, which cut its holding by 41.54% to finish the quarter with 33,420 shares.
Generally, the gurus appear to be thinking more like Grantham than Hotchkis & Wiley:
Conclusion
There is evidence from this year's quarterly results that Usana Health Sciences is getting back on track. It has registered year-over-year improvements to go with its robust financial strength and profitability.
Generally, the metrics suggest the company is modestly undervalued, which means it is available at a discounted price. Although not a lot of gurus have been purchasing, there appears to be some conviction buying.
This stock is worth the attention of value investors, but not of income investors. I expect most growth investors will want to see the share price start to recover before they take an interest.
Disclosure: I do not own shares in any of the companies named in this article and do expect to buy any in the next 72 hours.
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