WITH PRODUCT names like 5-Day High-Fiber Cleanse and Soyamax, it may surprise you just how quickly Salt Lake City-based Usana Health Sciences (USNA) is expanding. The marketer of nutritional and cosmetic products has seen its number of sales associates climb 35% in the past year as its profits surged 70%. And its stock returns make Avon Products' (AVP) three-year cumulative gain of 94% and vitamin seller NBTY's (NTY) 40% jump look paltry. Usana's shares during that time have spiked more than 3,000%.
It's not history that concerns us today, though. There's reason to believe that Usana's streamlined business model, which relies on a global network of independent sellers to peddle its products, is poised to continue delivering strong profits. The company turned up recently on our Efficiency Experts screen.
We gauge companies' efficiency using return on equity, or ROE. The measure is calculated by dividing profits by shareholders' equity, or book value. In other words, ROE tells us how much earnings a company can squeeze out of what it owns. Managers are often paid according to how high they can boost their companies' ROEs. That's generally, but not always, good for shareholders.
Here's why. ROE is the product of three other ratios multiplied together: profit margin (profits/sales), asset turns (sales/assets) and leverage (assets/equity). (The two "sales" and two "assets" cancel out, leaving profits over equity, or ROE.) So to increase ROE, managers need to increase one or more of its three components. If they can fatten margins by, say, cutting costs, or increase asset turns by making new products with existing machinery (a la Honey Nut Cheerios), all the better. But they can also goose ROE simply by employing borrowed funds which is not always in the best interest of long-term shareholders.
So pay careful attention to debt when assessing ROE. For our Efficiency Experts search, we also use return on invested capital, or ROIC. It works like ROE, but adds debt to, rather than subtracts it from, the bottom half of the ratio, which makes overborrowers look duly bad. Run this screen for yourself anytime using our stock screener and the recipe to the right. Recently, it turned up 12 companies, including Usana Health Sciences.
Despite its recent rapid growth, Usama isn't a big company. Its $550 million market cap and $241 million in trailing 12-month sales put it firmly in small-cap territory. About 69% of its 2003 revenue came from nutritional products, including vitamins, fiber supplements and protein powders. Top sellers include Usana Essentials (22% of total sales), a multivitamin, and Proflavinol (9%), a free-radical-busting pill. The company's Sense line of skin-care products contributed 12% of sales, and combination packages of goods from both product lines, as well as sales-training materials, made up the rest.
North America accounts for only about two-thirds of Usana's sales. Australia and New Zealand together make up 15% of revenue, Taiwan contributes 7% and Hong Kong, 4%. Newer markets for the company include Mexico, Japan, South Korea and Singapore. Most sales go through network-marketing associates, but the company has a preferred-customer list of people who can buy products for personal use (but not resell them), which contributes about 15% of sales.
Second-quarter results for the company, reported July 20, showed sales increasing 43% year-over-year to $67.2 million and profits ballooning 70% to $7.4 million. Per-share earnings of 36 cents, up from a year-earlier 20 cents, surpassed analysts' expectations by three cents. The company had 104,000 sales associates at quarter's end, up from 77,000 a year ago.
Chief Executive Dave Wentz credited the strong results to associate recruitment, and noted that he recently replaced managers in two key growth markets that have thus far been underperforming: Japan and South Korea. David Block, an analyst with Los Angeles-based stock research firm Seidler Cos., sees potential in Asia.
"With the company yet to crack the code in exploiting the enormous market opportunity in Japan, the world's second-largest direct-sales market, we are cautiously optimistic that Japan's new [general manager] will finally drive the market forward," wrote Block in a July 21 research note. He calls the stock "an excellent long-term investment" and notes that the most important metric to watch is associate growth, since it's correlated so closely with sales. (Block doesn't own shares of Usana; Seidler Cos. doesn't have an investment-banking relationship with the company.)
Just how efficiently is Usana Health Sciences operating right now? It has posted trailing 12-month profits of $26.5 million, on shareholders' equity of $44.4 million as of its second-quarter filing, for a ROE of about 60%. The median ROE for the companies that make up the Standard & Poor's 500 index is 15%. Since expanding its associate network requires little by way of capital investment, the larger Usana is able to grow its sales force, the higher its ROE will likely rise. Consider that direct-seller Avon today has a ROE of about 130%.
How pricey are Usana's shares after their recent run-up? They trade presently at 19.9 times Reuters Research's three-analyst 2004 earnings consensus of $1.44 per share. The average price/earnings multiple for personal and household products sellers is 19.7; Avon's P/E is 24.5. Usana is projected by analysts to grow earnings by 17.5% annually over the next five years, faster than the group's 8.6% and Avon's 15.0%. That gives the stock a price/earnings-to-growth, or PEG, ratio of 1.14, well below peers' 2.29, Avon's 1.63 and the S&P 500's 1.53, suggesting that this nutrient seller's shares may still have plenty of strong growth ahead.