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August 01, 2012

Canaccord Summary

A Perspective on Wall Street Valuations

by Scott Van Winkle, CFA



Click here to order the Direct Selling News issue in which this article appeared.


canaccord
Valuation of Publically Traded Direct Sellers over Last 10 Years
Graph
Source: Capital IQ and Canaccord Genuity research. Index comprised of Avon Products, Tupperware, Herbalife, Nu Skin, Blyth, USANA Health Sciences, Medifast and Nature’s Sunshine Products.

Wall Street can be a volatile home for direct sellers. Of course, it can be a volatile home for any company. However, this year has seen some significant volatility for many publically traded direct sellers, regardless of the trends underlying these businesses. Sharp sell-offs in the shares of Herbalife and Nu Skin a couple of months ago reflected the volatility inherent in investor opinion and captured the attention of many in the direct selling community. Most of the direct selling group shared in the selling pressure—at least in the near-term—and the result is that the valuations investors are paying for these businesses have compressed. However, the market has its ebbs and flows when it comes to investor confidence and if we take a broader look at direct selling valuations it adds some perspective to today’s stock prices.

Over the last decade, there has been a wide range of what investors are willing to pay for direct sellers. The peak valuation was about 20x forward earnings forecasts during 2003, and again briefly in late 2006. Avon Products and USANA Health Sciences were the most richly priced stocks at the time. The trough was of course the most recent recession, where a compounded effect of weak global economic growth and a strong U.S. dollar impacted the earnings outlook for global direct sellers, not to mention the U.S. focused market participants. The average forward PE over the last decade is 15.7x. Today it is 12.7x. Relative to historical averages, the direct sellers are undervalued today and are nearly 20 percent below the average valuation. However, as the accompanying chart indicates, the valuations of direct sellers have generally been contracting for the last five years. Now this analysis is limited, as it is an index of just eight publically traded stocks, all over $250 million of market capitalization and all listed on U.S. exchanges. However, this is a representative group with a large enough capitalization to minimize volatility and allow for analyst forecasts off which to base the PE analysis.

The conclusion is that the recent market volatility may simply reflect a broader trend of how investors are valuing direct selling stocks, as well as generally more modest valuations of the broader stock market over the comparable period. The direct selling business model is certainly coveted for its capital efficiency, strong cash flow trends and often its broad geographical exposure; but investors aren’t paying as much for growth as they often are with comparable retail businesses. The difference is likely visibility into the selling channel and comfort. The upcoming Q2 financial reports will likely return focus to the fundamental business trends in direct selling, which are robust for several of the publically traded companies.


Scott Van WinkleScott Van Winkle is a Managing Director of Equity Research at Canaccord Genuity, the global capital markets division of Canaccord Financial. Canaccord Genuity offers institutional and corporate clients idea-driven investment banking, research, sales and trading services from 20 offices worldwide. Van Winkle, based in Boston, has followed the direct selling channel since 1997.


Disclaimer: Canaccord Genuity has published research recommendations on Herbalife, Nu Skin Enterprises, USANA Health Sciences and Medifast and makes a market in shares of Herbalife, Nu Skin Enterprises, USANA Health Sciences and Medifast. Canaccord Genuity has provided non-investment banking securities-related services to Reliv International in the last 12 months. Past performance is not indicative of future results and these comments are not a recommendation to buy or sell the specific securities discussed.