Fortune rated beauty product marketer Natural Health Trends (NHTC, Financial) its fastest-growing company (1) on Monday.
In addition to being a fast grower, Natural Health Trends is a small-cap company (2). Natural Health’s shares closed at -1.52% that day.
Recent quarter earnings performance
Natural Health reported its second-quarter and first-half earnings on July 27. Natural Health delivered 40% sales growth to $154.7 million and 23.5% profit growth to $23.48 million. The company’s shares traded up 4.88% at market close that day with 2.7 times volume the previous day. Observably, the positive growth in Natural Health’s business operations did not carry over a few months after. The company’s shares slumped by 17% at the time of this writing.
Valuations
According to GuruFocus data, Natural Health had a price-earnings (P/E) ratio of 6.6 times (industry median: 20), price-book (P/B) value of 5.58 times (industry median: 1.6) and price-sales (P/S) ratio of 1.1 times (industry median: 0.99). The company also had a trailing 12-month dividend yield of 0.83% with a 5% payout ratio.
(Natural Health Trends Share Price, Google Finance)
Market performance
Natural Health has had an outstanding comeback since its shares almost flatlined between 2007 and 2013. According to Morningstar data, Natural Health shares provided a 113% total return for the past five years compared to 10.95% for the Standard & Poor's 500. Year to date, however, Natural Health gave -15.48% while the S&P 500 provided 7.27%.
Natural Health Trends
In its filing, Natural Health Trends defined itself as an international direct-selling and ecommerce company headquartered in Rolling Hills Estates, California. The company was founded on Jan. 22, 2001 and observed its 15th anniversary recently.
Natural Health, through its wholly owned subsidiaries, sells personal care, wellness and “quality of life” products under the “NHT Global” brand. The company has presence in the following markets: North America, Hong Kong, Taiwan, China, South Korea, Japan, Italy, Slovenia, Russia and Kazakhstan.
In fiscal year 2015, Natural Health had 92.8% ($245.7 million) of its total sales from Hong Kong. This figure also grew by 121% from 2014. Sales in the U.S., Canada and China also experienced outstanding growth: 125.7%, 99.9% and 187.7%.
As of December 2015, Natural Health employed 133 full-time employees worldwide.
The company operates its business through its subsidiaries primarily through network marketing (3). Natural Health, however, sells directly to consumers in China through its ecommerce retail platform.
(Natural Health Trends’ Five Distinct Categories, Annual Filing)
The international direct selling and ecommerce company has five distinct categories: wellness, herbal, beauty, lifestyle and home. As shown in the image above, the company carries several products, such as herbal supplements, nutritional supplements, home and car appliances among others. The trademarks presented above are all in part of the NHT Global branded products.
(See: Natural Health Trends Products)
According to Natural Health, these product categories – along with the business opportunity the company offers in most of its markets – provide its members a platform to further their goal of achieving and maintaining healthy, quality lifestyles complete with product supplementation and the opportunity for financial rewards.
(Natural Health’s Skindulgence™ 30-Minute Non-Surgical Facelift System, YouTube)
Operating strategy
Natural Health Trends operates on six key competencies (4):
1. Field leaders are experienced and culturally coherent.
2. Discipline and capability has been established to continue launching high-quality consumer products that meet the company’s objectives.
3. Developed and rolled out a comprehensive training system that provides a complete career path appropriate for its members.
4. Developed a year-round, multifaceted promotional plan that targets different segments of its membership and has proven most effective in the last few years.
5. Implemented a commission structure that makes it as easy as possible to join its business.
6. Continually improving mentality and methodology in its customer services.
(Read: Natural Health Trends Annual Filing)
Sourcing of Natural Health Trends products
To enhance Natural Health’s product offerings, its corporate staff works with the research and development personnel of its manufacturers and other prospective vendors to create product concepts and develop the product ideas into actual products.
The company generally purchases finished goods from manufacturers and sells them to members for personal consumption.
Marketing and distribution
The company sells its products internationally through a network marketing system, person-to-person direct selling. The company defined this system as its members (5) primarily refer NHT-branded products to prospective consumers. Natural Health’s members can also buy these products at wholesale prices for resale and/or for personal consumption.
As of June 30, Natural Health had 126,440 active members worldwide. This was a 65.5% growth in members compared to the same period last year. Natural Health’s members are independent full-time or part-time contractors who purchase products directly from its subsidiaries via the Internet.
Natural Health has its products designated with a specified number of bonus volume points. According to the company, commissions are based on total personal and group bonus volume points per weekly sales period. Bonus volume points, meanwhile, are a percentage of a product’s wholesale price.
Cash, debt and book value
As of June 30, Natural Health had $109.6 million in cash. The company also had no debt. Natural Health also just had 1.3% ($1.8 million) of its total assets in goodwill. The company had a book value of $57 million.
Cash flow
(Natural Health First Half Fiscal 2016 Cash Flow, Quarterly Filing)
Despite its health profit growth, Natural Health experienced a 23% decline in its cash flow from operations in the first half of the fiscal year compared to the same period last year. This was secondary to lower working capital found in its recent filing.
The company experienced lower figures in the following: accrued commissions, other accrued expenses, deferred revenue, amounts held in eWallets (6) and long-term incentive (7).
Natural Health allocated $524 million in capital expenditures, leaving it with plenty of free cash flow ($29.9 million). The company then spent $24.97 million in share repurchases and dividends in the recent six-month period.
This amount of net payout (8) was Natural Health’s biggest allocation in the past five years.
Conclusion
Natural Health Trends definitely demonstrated some form of resiliency in the past 15 years. More importantly, the company demonstrated a health balance sheet in current times. Observably, the company believed its shares were of good value when it authorized record-high share repurchases in the first half of this year with an average of 7.19 times earnings multiple in the period.
Yes, Natural Health Trends demonstrates value. The company is significantly undervalued when compared to its peers. In contrast, Natural Health Trends would have an intrinsic value of $27 a share when using its five-year average earnings multiple multiplied by its trailing earnings.
In summary, Natural Health Trends is a hold.
Notes
(1) Fortune: To qualify, a company — domestic or foreign — must be trading on a major U.S. stock exchange; report data in U.S. dollars; file quarterly reports with the Securities and Exchange Commission; have a minimum market capitalization of $250 million and a stock price of at least $5 on June 30; and have been trading continuously since June 30, 2013. Companies must have revenue and net income for the four quarters ended on or before April 30 of at least $50 million and $10 million; and have posted an annualized growth in revenue and earnings per share of at least 15% annually over the three years ended on or before April 30.
(2) Investopedia: Small cap is, generally, a company with a market capitalization of between $300 million and $2 billion.
(3) Entrepreneur: Network marketing is a type of business opportunity that is popular with people looking for part-time, flexible businesses. Some of the best-known companies in America, including Avon (AVP, Financial), Mary Kay Cosmetics and Tupperware (TUP, Financial), fall under the network marketing umbrella.
(4) Natural Health Trends: Read pages 2 and 3 of the company’s annual filing for further definition per competency.
(5) Natural Health Trends: The company generically uses the term “member” to refer to members who purchase for their own consumption or for resale, or both, as well as to members who only sign up to consume its products.
(6) Natural Health Trends: In 2014, the company commenced the use of electronic wallets (eWallet). Natural Health requires commission payments of certain members in Hong Kong to be first deposited into an eWallet account in lieu of being paid out directly to members.
The eWallet functionality allows members to place new product orders utilizing eWallet available funds and/or request commission payout via multiple payment methods. Amounts held in eWallets are reflected on the balance sheet as a current liability.
(7) Natural Health Trends: Financial rewards earned under the 2014 Long-Term Incentive Plan (the LTI Plan) are recognized over the performance period as specified performance or other goals are achieved or exceeded.
In accordance with the LTI Plan, 50% of any cash payment earned is payable in 35 equal consecutive monthly installments commencing in February of the calendar year immediately following the conclusion of the performance period and the remaining 50% of the payment earned is payable in 35 equal consecutive monthly installments commencing in February 2021 and ending in December 2023. As such, certain installments to be paid are reflected on the balance sheet as a noncurrent liability, and the current portion of the installments is reflected in other accrued expenses.
Disclosure: I do not have shares in any companies mentioned in this article.
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