Shares of Nu Skin Enterprises (NUS) are soaring today after the multi-level market of personal care products and nutritional supplements received a $210 million investment from a Chinese firm and offered upbeat guidance. Stifel’s Mark Astrachan and Claire Chamberlin are puzzled by the deal–and doesn’t believe Nu Skin deserves a premium valuation when compared to peers (think companies like Herbalife (HLF) and USANA Health Sciences (USNA):
After the close, Nu Skin Enterprises announced a $210mm strategic investment from a consortium of Chinese investors, including a subsidiary of Ping An Insurance Company of China. The investment consists of 4.75%, four-year convertible senior notes with an initial conversion price of $46.50 per share and includes the right to a board seat by a consortium member. Additionally, the company said 2Q16 sales would be at the high-end or slightly above previous guidance of $560-$580mm, compared to current consensus of $578mm. In a separate press release, Nu Skin announced the president of Greater China, Andrew Fan, was reassigned and will be replaced by Charlene Chiang, the current president of Taiwan.
Our initial take on the deal is that it is modestly favorable as the investment in part comes from a company (Ping An of China Securities Company) owned by a large Chinese insurance company (Ping An Insurance Company of China), providing Nu Skin with connections and best practices from a local business. We believe this could help Nu Skin navigate potential political headwinds in Mainland China, the company’s most important growth market accounting for ~25% of overall sales, particularly given the damaging government investigation into its business practices in early 2014. That said, we find the investment notable in that Nu Skin seemingly does not need cash, net debt of ~$0 at 1Q16, and has access to a meaningful portion of its revolver at a lower rate than the to-be-issued convertible notes. This implies Nu Skin believes access to the Chinese investment consortium justifies the higher rates, in our view.
2Q16 sales are slightly above consensus expectations and likely driven by the introduction of an LTO (limited time offer) of a new skin care system, ageLOC Me, in the quarter. That said, the company did not update 2Q16 EPS or full-year guidance. We believe this reflects continued limited visibility into current sales trends and whether an improvement in sales leaders, typically a leading indicator of company performance, driven by the LTO cycle is likely and/or sustainable. Relatedly, we think the Greater China leadership change is consistent with the lack of visibility in region results and note Mr. Fan had been in his role since 2007. Additionally, current valuation places NUS shares at a premium to direct-selling peers, unwarranted, in our view, given share loss in China and potentially weakening end-demand.
We nonetheless expect NUS shares to outperform near-term as we believe investors could interpret the strategic investment as an implicit approval of Nu Skin’s business by the Chinese government. We also anticipate the company will use a portion of the proceeds of the convertible notes to repurchase shares, with any share dilution potentially offset by a company option to settle the convertible in cash at the end of the period.
Nu Skin trades at 14.41 times 12-month forward earnings forecasts, compared to 11.18 times for Herbalife and 12.16 for USANA Health Sciences.
Shares of Nu Skin Enterprises have jumped 10% to $44.85 at 10:05 a.m. today, while Herbalife is little changed at $59.20, and USANA Health Sciences has declined 0.7% to $114.73.