From international expansion to targeting markets buoyed up by supportive inelastic demand, Nu Vitality Labs (PINK:NVUI) offers high upside with little downside. Management has built revenues to millions of dollars within three years. It is now taking that talent to a new level at Nu Vitality through leveraging a strategy that has proven to work at peer models. Given the dearth of informational flow about the company, it is only a matter of time before analysts start picking up on its growth story. By the close of Tuesday’s trading, the stock price rose 6.8%.
There are several key value drivers that, in my view, will result in Nu Vitality’s stock heading skyward. First, it doesn’t take financial calculus to figure this one out – you only need multiplication to reveal a value discount. In the United States, $60B is being spent annually – and growing – on diet and weight loss. Targeting this market, Nu Vitality has launched three products with strong scientific backing and attractive price points. If Nu Vitality is able to capture just 0.04% of this market and is valued at 1.26x sales – like its peers are – then these three products alone are worth $30.2M domestically. Again, this is just multiplication.
But that is just one piece to the puzzle – there are other factors that need to be weighed. The company is expanding abroad and has an e-commerce platform, backed by a partnership with Pershing Processing, that will further drive value creation. Moreover, Nu Vitality is diversified in treating a variety of conditions related to cholesterol, diabetes, Alzheimer’s, arthritis, and dementia. This broad exposure soundly hedges against demand fluctuations. And the complete line of beauty products further provides an attractive marketing vehicle to spread awareness.
Thirdly, Nu Vitality employs a direct selling method that incentivizes distributors to aggressively grow volumes. Herbalife and Avon Products (NYSE:AVP) have used this unique strategy in the past and it has substantially benefited shareholders.
Based on the increasingly optimistic atmosphere surrounding the company and operational performance to support it, Nu Vitality merits a “strong buy” rating. Early investors are to gain the most as value drivers are further uncovered.
Herbalife is similarly discounted meaningfully below intrinsic value and it, accordingly, receives one of the top ratings on the Street. The company has showcased stellar momentum with top growth in volumes and headcount. One only need to review its past record to see why a firm like Nu Vitality will predictably rise. Let’s start with Mexico: within less than 9 years of entering this market, the company grew nutrition club count from 0 to 25K while gaining 380 bps in volume points per capita. Now, let’s move over into China, Brazil, and India, where there are now roughly 800, 800, 1K, and 8.5K clubs, respectively. Fair to say, this qualifies as “impressive market penetration”.
What makes the value story for Herbalife and Nu Vitality all the more attractive is how past growth builds off of itself. Insofar as the two meet historical gross addition levels within distribution networks, scale is set to accelerate. The former has supervisors of nutrition clubs trending towards a retention rate of 70%. With the typical nutrition club having 6.8 supervisors, a 1% club growth will yield 700 more. Assuming a multiple of 20x and a conservative 2012 EPS of $3.41, the firm has at least 20.7% upside. Based on the visibility surrounding proliferation, the stock also has low downside. Accordingly, it merits Wall Street’s “strong buy” rating.
While there is a significant degree of certainty surrounding Nu Vitality and Herbalife, Avon Products is a different matter. Mired in a bribery scandal and competitive underperformance, Avon has fallen significantly over the last six months. With its strong brand name and diverse product offerings, however, the case for a turnaround and subsequent dramatic rise in value is certainly there.
Having worked on shareholder activist campaigns, I can safely say that Avon is on the radar of being a target. For reference, I have illustrated the significant extent to which “corporate raiding” can generate positive abnormal returns. An operational and management shakeup, generally, and the full departure of Andrea Jung, specifically, would be most accretive to EPS going forward.[/color]
In an earlier article, I recommended that management explore splitting the role of Chairman and CEO in order to raise confidence. Soon after, they and shareholder value – not surprisingly – took off like a rocket, gaining 10.5% in the short period to date. Management would be wise to “go Carl Icahn” on the company and iterate a commitment to returning free cash flow to shareholders. The dividend yield stands at at an impressive 5.4%, but investors are unsure about its sustainability given pressure from high leverage and volatility.
Consensus estimates for Avon’s EPS forecast that it will decline by -2.2% to $1.76 in 2011, decline by 0.6% in 2012, and then grow by 11.4% in 2013. Assuming a multiple of 15x and a conservative 2012 EPS of $1.67, the rough intrinsic value of the stock is $25.05, implying substantial upside. Modeling a 2.7% CAGR and then discounting backwards at a WACC of 9% further confirms this fair value figure. To be clear, Avon is a deep-value play that activist hedge funds will strike on if underperformance continues. Consequentially, I strongly recommend Avon, Nu Vitality, and Herbalife.