USANA (USNA)

[SeriousMoney]

DD 8/11/05: Reliable Results <By Jack Hough, SmartMoney.com>...
http://yahoo.smartmoney.com/stockscreen/index.cfm?story=20050811intro&afl=yahoo

USANA HEALTH SCIENCES (USNA) is on a tear. Shares of the marketer of a nutritional plan called the "5-Day High Fiber Cleanse" had soared 30-fold over three years when we featured them in an Efficiency Experts screen a year ago ("A Model of Efficiency"). Since then they've climbed another 67%.

Of course, history isn't what interests us. There's reason to believe Usana shares are poised to continue their ascent; they recently made an encore appearance in our Efficiency Experts screen.

The centerpiece of our screen is an efficiency measure called return on equity, or ROE. It's calculated by dividing a year's worth of a company's earnings by its net worth, or total assets less total liabilities. Think of ROE as a management report card. It shows the amount of profits the bosses can squeeze out of the resources they've been entrusted with.

Companies with hefty internal returns show that they're doing the things that can lead to generous stock returns. Managers seeking to boost ROE — and many are paid according to how well they do just that — can do so by expanding profit margins or increasing the amount of sales they generate from existing plants and equipment. Either of those accomplishments are likely to give shares a lift, too.

Usana Health Sciences (USNA) - Develops and manufactures nutritional, personal care and weight management products. Distributes its products through a network marketing system.
Thursday's Close $47.91
Market Value $907 million
Trailing 12-Month Sales $302 million
2005 P/E 24
Proj. Long-Term EPS Growth Rate 18%

One caveat: There's a third way to boost ROE that shareholders don't necessarily welcome. That's by borrowing. Since debt makes a company's net worth smaller, thereby shrinking ROE's denominator, it gives the measure an artificial nudge. That's not unreasonable if the borrowing is wise and warranted — low-interest debt used to generate fat returns, for instance. But just to be safe, we include another measure in our Efficiency Experts screen called return on invested capital, or ROIC. It measures the earnings a company generates on everything it owns and everything it has borrowed, making over-indebted companies look duly bad.

Use our stock screener and Efficiency Experts recipe anytime to run our search for yourself. Recently it produced a list of 10 companies, including Usana Health Sciences.

Based in Salt Lake City, Usana over the past year has booked $302 million in sales of nutritional products like powdered drink mixes and health bars, and personal-care products such as moisturizers and shampoos. The company distributes its products through a network of direct marketers a la Avon (AVP). That keeps costs to a minimum — one of the reasons the company's internal returns make a mockery of those of store-based nutritional-products sellers. Its return on equity at the moment is about 59%. The average for drug stores is just 14%.

Second-quarter results for the company, reported July 19, blew past Wall Street estimates. Sales increased 22% year-over-year to $82 million. Earnings from operations swelled 31% to $14.7 million. Earnings per share of 48 cents topped analysts' expectation by two cents.

Analysts say the most important metric for Usana investors to watch is the company's number of sales associates. It had 104,000 at the time of our last story (up from a year-earlier 77,000). Today it has 125,000. Expect to be offered a job soon by a relative you haven't spoken with in a while who suddenly calls to talk about fiber. This fall Usana plans to roll out an incentive plan whereby its present associates will be paid to recruit new ones. The company has 1% of sales, or about $3.5 million, earmarked for incentives. Of course, it only spends the money if it achieves the desired result — a marketing setup most drug stores can only envy from afar.

International growth for Usana looks especially promising. Mexico was a strong performer for the company in its second-quarter, with sales growth of 76%. Sales improved significantly in each of the company's top five markets, by 19% in the U.S., 24% in Canada, 33% in Australia and New Zealand, 21% in Hong Kong and 20% in Japan. Management plans to announce a new market in the fourth quarter. (Mainland China might be a problem; industry watchers say multilevel marketing there is viewed by the government as too, well, multilevel.)

What's next for the stock? Despite the eye-popping gains in recent years, it looks affordable. Shares trade at 24 times forecasted 2005 earnings. Usana is projected by analysts to boost its earnings by 18% annually over the next five years. That gives the stock a price/earnings-to-growth, or PEG, ratio of 1.3. The average for drug stores is 1.7. The S&P 500's PEG is about 1.6. At that price, this network marketer's highflying shares continue to make a convincing pitch.