NATR - Nature's Sunshine Products Is Attractive At Current Prices

2023-04-20 05:04:42 ET

Summary

• Net sales declined in 2022 as a consequence of negative foreign exchange impacts and declining demand, especially in Europe.
• Gross profit and EBITDA margins are temporarily depressed due to inflationary pressures, negative foreign exchange rates, and higher transportation costs.
• The balance sheet is very robust thanks to high cash and equivalents and inventories, and virtually zero debt.
• The management expects significant share buybacks in 2023.
• This represents a good opportunity to acquire shares at cheaper prices.

Investment thesis

Nature's Sunshine Products ( NATR ) is undergoing several headwinds that have caused a sharp decline in the share price. First, foreign exchange headwinds caused a $23 million impact in net sales during 2022, and then the war between Russia and Ukraine, as well as inflationary pressures, caused a 10% decline in net sales from European markets during the same year. In addition, these headwinds, to which we must add increased transportation costs, have caused a strong impact on profit margins, which has pushed down cash from operations to levels close to zero.

Still, Nature's Sunshine Products' situation is advantageous in the current macroeconomic context thanks to its strong balance sheet, which is virtually debt-free, and very high inventories and cash and equivalents. Furthermore, inventories and accounts receivable increased in 2022 while accounts payable declined. That is why I believe that the company is prepared to overcome current headwinds and even a potential recession as a result of interest rate hikes to alleviate the high inflation rates around the world. In this regard, NATR stock's current price, which accumulates a total decline of ~50% from recent highs of $21.50 reached in April 2021, represents a good opportunity for those investors interested in buying shares of the company and holding them until optimism reigns among investors again.

A brief overview of the company

Nature's Sunshine Products is a natural health and wellness company that manufactures herbal nutritional and personal care products and sells them through independent consultants. The company was founded in 1976 and its market cap currently stands at ~$195 million, employing around 800 workers.

The company manufactures over 800 different products that are primarily sold in Asia, Europe, North America, and Latin America, with a strong focus on Asian countries. Now, the company plans to introduce its products on Amazon ( AMZN ) Business to drive sales growth. The company's product portfolio includes immune, cardiovascular, digestive, personal care, weight management, and other general health products, and it periodically launches new products in order to adapt to consumer trends. It entered the CBD market in September 2019 by launching a full line of hemp-derived CBD products. In September 2021, the company also launched l'amara, a new clean beauty product line including a daily nourishing cleanser, a moisture boost emulsion, radiance oil, an eye cream, and a skin-activating toner. Later, in January 2022, the company launched Aivia, a new line of nutrition products for fitness and weight management purposes. But despite these efforts, current headwinds are having a significant impact on the price of shares.

Currently, shares are trading at $10.69, which represents a 50.28% decline from recent highs of $21.50 on April 30, 2021. In this regard, recent declines in net sales and profit margins as a result of negative foreign exchange impacts, inflationary pressures, higher transportation costs, and the war between Russia and Ukraine have given way to a very pessimistic sentiment among investors. Also, the company expects a one-time pre-tax charge of up to $4.8 million in the first quarter of 2023 as it was a victim of a phishing attack during February. But despite these headwinds, I will explain in this article why this pessimism represents a good opportunity for the most patient investors willing to wait for the macroeconomic outlook to improve.

Net sales are expected to recover by 2024

The company's net sales have remained somewhat stagnant over most of the past decade but experienced a 15.29% increase in 2021 and a 4.99% decline in 2022 as a result of a $23 million foreign exchange impact and a 10% decline in European markets. Using 2022 as a reference, 44.15% of the company's total net sales take place in Asia, whereas 31.57% are generated within the United States, 18.72% in Europe, and 5.55% in Latin America and the rest of the world.

More specifically, net sales increased by 7.88% year over year during the first quarter of 2022 but declined by 4.42% during the second quarter, 8.92% during the third quarter, and 12.88% during the fourth quarter as macroeconomic and geopolitical headwinds related to the war between Russia and Ukraine and high inflation rates caused decreased demand in China, Europe, and North America. Nevertheless, net sales would only have decreased by 6% year over year during the fourth quarter if no forex headwinds took place. In this regard, net sales are expected to partially recover in 2023 by increasing by 1.84%, and surpass 2021 by increasing by a further 6.92% in 2024.

But despite the fact that the drop in sales has not been significant and that they are expected to recover by 2024, the large drop in the share price has caused the P/S ratio to experience a sharp decline to 0.497, which means the company generates net sales of $2.03 for each dollar held in shares by investors, annually.

This ratio is 21.61% lower than the average of the past decade of 0.634 and represents a 53.59% decline from the peak of 1.071 reached in 2021, which reflects the high level of pessimism among investors not only due to the slight drop in sales but also as a consequence of a drop in profit margins as the company has much less capacity to convert these sales into actual cash.

Profit margins remain depressed

The company has historically achieved positive gross profit and EBITDA margins year after year, yet trailing twelve months' gross profit and EBITDA margins have declined to 71.05% and 6.28%, respectively, throughout 2022 due to inflationary pressures and forex headwinds negatively impacting the cost of goods sold, as well as declining volumes.

Despite this, the gross profit margin partially recovered during the fourth quarter of 2022 as it stood at 72.18%, but the EBITDA margin is still experiencing a significant contraction at 6.13% due to foreign exchange headwinds, increases in material production, transportation, and distribution costs, as well as changes in market mix. Furthermore, these headwinds are expected to remain a challenge at least during the first half of 2023. In this regard, the management is planning strategic price increases in its product prices and expects a $10 million to $12 million gross savings achievement by the end of 2023 and the beginning of 2024. The problem is that as long as profit margins remain depressed, cash from operations will be very limited.

In this regard, trailing twelve months' cash from operations dropped to $0.71 million during the past quarter while capital expenditures maintained their upward trend to $7.682 million. Still, inventories increased by $8 million and accounts receivable by $5.2 million in 2022 while accounts payable declined by $3.4 million, which means the impact hasn't been as significant as it seems.

As for the past quarter, cash from operations was $3.6 million and inventories increased by $0.3 million while accounts receivables increased by $4.1 million and accounts payable decreased by $1.2 million, which means operations remain sustainable at this point. This means that the company still has plenty of leeway amidst current and potential headwinds not only because of its robust balance sheet but also because of its positive cash from operations despite depressed profit margins.

The company enjoys a very robust balance sheet

The company enjoys a virtually debt-free balance sheet as it only holds $1.2 million of long-term debt while cash and equivalents are very high at $60.03 million. And not only that, but inventories are also very high.

In this regard, the company has raised inventory since 2019 to $67.95 million at the close of 2022, and cash and equivalents experienced a significant decline to $60 million from over $80 million at the beginning of 2022 as a consequence. The management expects to make use of its inventory in 2023 and thus generate positive cash from operations to withstand current inflationary headwinds while performing share buybacks in order to take advantage of the depressed share price.

Share buybacks are expected to continue in 2023

Share repurchases began running during the second half of 2021, and during the fourth quarter of 2022 the management stated that it expects to execute share repurchases of $13.6 million in 2023 as $24.0 million remained in the company's ongoing share repurchase program.

This means that the percentage of the company that each share represents will be higher when there are fewer outstanding shares, which will allow investors to enjoy improved per-share metrics as the company's profits will be calculated among fewer shares.

Risks worth mentioning

Although it is true that I consider the company's risk profile to be quite low thanks to its robust balance sheet and practically no debt, I would like to highlight certain risks that I consider worth mentioning for the short and medium term.

• Inflationary pressures could persist for longer than expected, forcing the company to continually raise the price of its products in order to offset the impact on profit margins while consumers lose purchasing power.
• The increase in the price of the company's products to offset inflationary impacts could result in a decrease in demand due to the decreasing purchasing power of consumers.
• Rising interest rates to stabilize inflation rates around the world could cause a global recession, which would drive purchasing power and consumer confidence to levels significantly below current levels, potentially leading to reduced sales, and therefore, lower profit margins as a consequence of declining volumes.
• And lastly, share buybacks could be paused at any time if profit margins continue to fall so the management may not be able to take advantage of the company's low share price to significantly reduce the number of outstanding shares.

Conclusion

It is true that the company's situation is quite delicate due to reduced net sales and profit margins, but the headwinds it is currently facing are directly related to the current macroeconomic context, which suggests that their nature is eminently temporary. Furthermore, the company remains (weakly) profitable, so these headwinds are not weakening its balance sheet. That is why, in addition to its strong balance sheet with practically non-existent debt and very high cash and equivalents and inventories, I strongly believe that this is a good time to acquire shares at a great discount and wait for investors' optimism to regain strength again.

Even so, I would like to emphasize that the non-existence of a dividend, added to the strong cyclical nature of the company (which is evident in its share price) suggests that it will be necessary to close the position once the global macroeconomic environment improves and, with it, the expectations of the company.

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