Inside Wall Street: Athletes, actors high on nutrition supplements

The small player's growth and low valuation are too good to resist.

By Gene Marcial Dec 5, 2011 9:57AM
SuperStockPlenty of people regularly take nutritional supplements in an effort to boost their nutrients or enhance dietary goals. Among the top believers are some of the famous athletes, particularly skiers, speed skaters as well  as tennis, basketball, and football players. Some are Olympians, including Jennifer Heil, an Olympic Champion Mogul Skier. Runway fashion models and red-carpet film stars are also among celebrities who are hot on nutritional food aids. Actor Tom Cruise created quite a controversy in 2005 when he criticized Brooke Shields for taking anti-depressant pills rather than vitamins to fight post-natal depression. 

 

The nutrition food business has developed into a global and steadily growing multi-billion dollar  industry. In the U.S. alone, consumers seeking an edge in staying fit and healthy spent some $117 billion on nutrition foods last year, with nutritional supplements taking a 24% share of that market. The rest are split among “functional” food, which had a 34% share, natural-organic food with 33%, and household-care products with 9%.

 

The science-based nutritional supplements, which include products billed as antioxidants, replacement meals, vitamins, and low-glycemic formulations, are among the most sought-after and fast-growing health food aids. Their objectives range from providing preventive care and supplying nutrients that people may not otherwise get from their diets, to reducing the risk of heart disease as well as maintaining healthy cholesterol and blood- pressure levels. 

 

So it isn’t surprising that Wall Street has started paying attention to some of the healthy stock plays in the business. So far these stocks haven’t been on top of favored or widely followed lists among investors.

 

USANA Health Sciences (USNA) is a major player but isn’t the biggest in the industry. Nonetheless, its potential for expanded  growth is attractive, and analysts say its stock is still inexpensive. At $32 a share and with a market capitalization of $500 million, the stock is trading at a discount to its peers with its price-earnings ratio of 10, which is among the lowest in the industry.

 

When compared with Herbalife (HLF), the biggest and best known in the business, USANA is a tiny rival. With a market cap of $6.1 billion, Herbalife’s stock, currently trading at $53 a share, and is selling at a much higher price-earnings multiple of 17. Analysts note that many, if not most, investors who follow and favor the nutritional supplement business already own shares in Herbalife. USANA, on the other hand, is still below the radar of most investors and remains under-appreciated and underpriced, they say.

 

But some of the large institutional investors have already caught on and have snapped up more shares in the third quarter. The biggest buyers of the stock as of Sept. 30., 2011, were led by Fidelity Management, which bought 352,900 shares, followed by Kennedy Capital, a value-oriented investment firm, which acquired 150,000 shares. The third biggest buyer during the quarter was Capital Research Global, which purchased 142,000 shares. 

 

Recently, USANA’s stock has been pepped up by the company’s third-quarter results and engendered by management’s positive outlook and improved sales and earnings guidance for 2011 and 2012. The stock climbed to $32.43 at the close of trading on Dec. 2, 2011, up from a 52-week low of $23.60 on Aug. 19, 2011. The stock had posted a 52-week high of $46 in early December of 2010. 

 

USANA’s projected earnings growth of about 13.6% is “too good to resist” for a stock trading at about 10 times current year per-share earnings ,” says Timothy S. Ramey, an analyst at investment firm D.A. Davidson, who rates the stock as a buy.

 

“We think USANA’s earnings growth deserves a higher valuation,” he argues. So he has raised his stock price target to $46 from $44 for the next 12 to 18 months, based on a p/e multiple of 12.7 times his estimated 2012 earnings of $3.60 a share and on projected revenues of $624 million. For 2011, Ramey expects earnings to jump to $3.23 a share, up from 2010’s $2.86. Over the next five years, he expects the stock to hit $55 a share.

 

To make nutritional supplements more exciting products USANA has started to offer a personalized service in which customers can go online to create a supplement program that meets their specific needs, rather than just buying the standard nutritional aids. These personalized products would even include the customer’s name on the label, noting that the products are specifically made for that customer. 

  

While the company reported increased earnings and revenue results in the third quarter, sales in North America were off by more than 1% during the period, but that was offset by sales in the Asia Pacific region, which jumped 12.6% to $84.5 million. Asia, particularly China, is USANA’S targeted market for expanded future growth, says USANA CEO Dave Wentz. China now accounts for some 36% of USANA’s total sales vs. North America’s 41%.     

 

“We have made excellent progress in 2011 on product introductions in China, and we’ll introduce four more  USANA products in the fourth quarter, which we believe will be very well received,” says Wentz. Next year, he adds, USANA’s expansion in foreign markets will include opening major headquarters in France, Netherlands, and Thailand.

 

In the meantime, Wentz assures that “stability and growth in North America remains a significant focus of our short and long-term strategy.” The focus will emphasize personalization coupled with market-specific incentive offerings, he adds. This will drive long-term growth, says Wentz, as they are “designed to help return excitement to our business.”

Gene Marcial wrote the Inside Wall Street column for Business Week for 28 years and now writes the column for MSN.com. He also wrote the book, Seven Commandments of Stock Investing, published by FT Press.
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