When I previously wrote about Usana Health Sciences Inc. (USNA, Financial) in July 2014, I asked if you (investors) would bet on this multi-level marketing company—or on the short sellers. At that time, there was a lot of short interest, 35.5%, despite the stock being found on three GuruFocus screens: Undervalued Predictable, Buffett-Munger and Peter Lynch.
A company on one or more of these screens is considered a bright prospect. A company with that much short interest is considered a very risky bet.
Short selling of Usana shares peaked in March 23, 2013 at 76.2%, an extreme level. It was driven mainly by a report from Citron Research that alleged Usana was illegally operating in China. Bill Ackman (Trades, Portfolio)’s high-profile short attack on Herbalife (HLF, Financial), another multi-level marketing company, also had an effect.
But if you had bet with the shorts in 2014, you would have lost, as this five-year chart of short interests (blue line) shows:
Not only did Usana beat the shorts, but it has almost driven them out altogether (4.3% in the latest report).
The company develops, manufactures and sells nutriceuticals; Usana calls them science-based health products and they are generally well regarded.
Today, we are taking a second look because Usana came through a Macpherson model search in the All-in-One screener. The model searches for potentially great companies at potentially great prices. The great companies’ criteria are:
- No debt.
- Return on assets: a median score of at least 15% based on the previous 10 years.
- Return on equity: a median score of at least 15%, same time period.
- Return on capital: a median score of at least 15%, again in the same time period.
Usana clearly meets those thresholds with:
- No debt.
- Return on assets: Over the past 10 years, ROA has been in the low- to mid-20s, except for calendar 2017, when it was 12.63%.
- Return on equity: In nine of the past 10 years, ROE has been above 30%, except for 2017, when it was 18.17%.
- Return on capital: Over the past 10 years, ROC has ranged between 41.4% and 73.29%.
Usana not only meets the thresholds, but exceeds them by significant margins. Subject to further due diligence, we can say it is a “great company.”
Turning to the issue of price, or valuation, the discounted cash flow figures provided on the Macpherson All-in-One page show different directions:
- Present value, based on DCF-free cash flow, comes in at $121.37, compared to the April 2 closing price of $85.50. This indicates Usana is currently undervalued.
- Present value, from DCF-earnings, is assessed as being $48.79, which suggests the stock is overvalued.
So there is no consensus on Usana’s valuation.
What do others think, and what are they doing about this stock?
Four GuruFocus gurus owned this company at the end of 2017, but two of them had very small holdings. Jim Simons (Trades, Portfolio) had the largest position at almost 2 million shares (giving him just over 8% of the outstanding shares), while Hotchkis & Wiley held over 12,000. David Dreman (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) each held fewer than 500 shares. Also during the fourth quarter, Paul Tudor Jones (Trades, Portfolio) sold out of his position.
Insiders owned a strong stake in the company at the end of 2017, almost 5%. The biggest of the insiders are two members of the founding Wentz family. Institutional investors jumped into the stock in the fourth quarter, increasing their stake from 43% to 54%. This chart shows how they are moving back toward earlier and higher levels:
The analysts followed by Nasdaq.com have a neutral position:
These analysts, and there are likely just a few of them, have a consensus price target of $95 after 12 months. That’s a 10.7% increase. Usana does not pay a dividend, but bought back almost 2% of its shares in 2017.
What are we to make of Usana now, given its high marks for company greatness and mixed messages about its valuation? To address this question, quantitatively, we can assess the strength of its moat, its competitive advantage. This will give us insight into the company’s prospects over the next three to five years.
In the Macpherson model, return on capital is combined with return on tangible equity to assess the sustainability of a company’s moat. As we saw, Usana has a high ROC; now, here are the specifics for the past 10 years:
- 2008: 57.83%
- 2009: 55.14%
- 2010: 47.94%
- 2011: 41.40%
- 2012: 55.62%
- 2013: 69.01%
- 2014: 65.87%
- 2015: 73.29%
- 2016: 69.71%
- 2017: 46.35%
All returns on capital come in well beyond the threshold of 15%; indeed, it has tripled and quadrupled the threshold in several years.
Return on tangible equity is the other contributor to moat strength. It, too, is robust:
- 2008: 101.35%
- 2009: 70.77%
- 2010: 58.41%
- 2011: 50.46%
- 2012: 55.56%
- 2013: 48.55%
- 2014: 41.29%
- 2015: 47.76%
- 2016: 40.07%
- 2017: 21.38%
While robust, the numbers have generally trended downward for ROTE. The conclusion: Usana has a moat that was once very strong, but is now looking shallower.
Its share price went into a strong, although bumpy, upward trend between 2013 and 2015, as shown in this five-year chart:
Over those five years, the price gained 261%, but most of it before peaking in August 2015. Since then, it has been somewhat rangebound. Investors will ask if it will continue climbing or will slip back down again.
Conclusion
Usana Health Sciences has definitively beaten the shorts, and that shadow has been lifted from the company’s share price.
Given its performance in the past decade, Usana has the quantitative data to make it a great company. Whether available at a great price, though, is an arguable proposition. As illustrated in the five-year price chart above, however, it is volatile, and a great price may be available for investors willing to wait for next price slump.
Value investors will also want to see if the company can turn around the trend in the ROTE component of its moat. The company remains well above the 15% threshold, but has noticeably gone down.
The return of institutional investors is a bullish sign for long-term investors, as is the healthy state of its insider holdings.
Overall, this stock should have a place on the watch lists of value investors who are willing to wait, watching its price and the state of its moat.
Disclosure: I do not own shares in any of the companies listed, and do not expect to buy any in the next 72 hours.
