Nature’s Sunshine Products Stock Will Shine (NASDAQ:NATR)

Nature’s Sunshine Products (NASDAQ:NATR) represents another opportunity where the odds are on our side. A company is a $10 stock with no debt and $2.97 per share in cash while it solves some costs issues that arose from inflation. The market sentiment around the stock is too negative and minor improvements in its business or good news should move the stock higher.

The company

Nature’s Sunshine Products was founded in 1972 and is a nature and wellness company primarily engaged in the manufacturing and direct selling of nutritional and personal care products. NATR’s product line has more than 700 products over several lines of segments, such as immune, cardiovascular, digestive, personal care, weight management and other general health products. They purchase herbs and other raw materials in bulk, they formulate, encapsulate, tablet or concentrate them, label and package them for shipment, and most of their products come from their manufacturing facility in Spanish Fork, Utah.

They are Multi Level Marketing – MLM – company since the distribution is made by their network of independent consultants who market their products to customers through direct selling techniques and sponsor other independent consultants who also market the products to customers.

Current situation

The company stock price has fallen more than 50% since its May 2021 52-week high. The company has fallen due to broad market conditions and mainly after its 1Q2022 results in May 2022, which were below expectations.

The 1Q2022 results were major earnings miss and resetting of expectations for 2022. The company cited some reasons for the miss:

The events and conditions include, among others, the major Russia-Ukraine conflict; much more heightened inflationary and supply chain pressures, including double-digit cost increases for many raw materials; expanded product availability issues and increased transportation, distribution and production expenses; expanded COVID-related lockdowns in certain markets, including China; reduction in disposable income for much of the U.S. and for certain other markets population; and a strengthening dollar against many currencies.

During the earnings call, the company commented on the headwinds but also painted a bleaker future for 2022 with sales decreasing low to mid-single digit and COGS increasing from previous years for foreseeable future. NATR also had a significant presence in Russia and Ukraine, which are impacting the sales decrease. In fact, it represented 13% of the sales in the quarter. It’s easy to see why the market reacted so negatively, with sales decreasing, inventory impairments due to the war in Europe, inflationary pressures on costs and supply chain constraints due to lockdowns in China.

In the most recent earnings call, 3Q2022, after 300 basis point contraction on gross margin the company laid out plan to reduce costs by $10 to $12 million. The focus will be on the manufacturing part of the business and seems realistic. The plan will have three main initiatives, first raw materials – the company will do a deep review of its ingredients, packaging, and formulations, secondly will look at improving efficiencies and driving out waste of their manufacturing activities by optimizing their production schedules through prioritizing production rounds, improving preventive maintenance, and reducing change over time. These measures are expected to increase uptime, improve yield, and deliver significant savings. Lastly, NATR management will look at logistics and transportation to reduce the amount of air freight, truck utilization and increase pallet density. While the plan seems attainable the effects will only be felt in late 2023 and 2024, since there is a need to go through a full inventory cycle for the costs to appear on the financials.

Valuation

The fact that Nature Sunshine Products has 30% of its market cap in cash on its balance sheet is the first sign that the company is undervalued. Nevertheless, a look at the company numbers shows that even without accounting for the cash on the balance sheet the company is undervalued.

Earnings Power Value ($ millions)	Worst Case	Base Case	Best Case
Sustainable revenues	400	426	426
Implied Operating income	16	22	25
Operating Margin	3.9%	5.2%	5.8%
Taxes @ 21%	3	5	5
Maintenance Capex	6	6	6
Depreciation	11	11	11
Earnings Power	17	22	24
EPV Multiple	14	14	14
EPV	237	309	339
Debt	1	1	1
Investments and cash	57	57	57
Intrinsic Value	293	364	395
Shares outstanding (millions)	19.2	19.2	19.2
Intrinsic value per share	15.3	19.0	20.6
Upside	60%	99%	115%
Cash as % of stock price	31%	31%	31%

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The company Earnings Power Value is between $237 million in the worst-case scenario and $339 million in the best case. Nevertheless, even in the worst-case scenario the operations without the cash, are worth $12.4 per share or 30% above current share price. Adding the cash NATR worth goes up to $15.3 per share, which represents a 60% upside. The assumptions in this scenario are already in the business, in my opinion. Sales of $400 million represent a 10% decrease compared to 2021 sales, and the company hinted that sales decrease for 2022 would be around low to mid-single digit. In the base and best-case scenario sales are the last 3Q annualized. The operating margin is assuming the average of the last six years in the worst case and increase to 5.2% and 5.8% in the base and best case, respectively. The increase is associated with the current savings plan announced by the company in the last earnings call. The base scenario assumes that the company achieves 50% of the savings outlined in its plan and the best case assumes 75% success rate. The maintenance capex is the average capex of the last six years, and the depreciation is the last year depreciation, since it’s a more accurate representation of the expense going forward. The EPV multiple chosen is the company peer group median P/E.

Risks and opportunity

As with every investment opportunity there are risks involved, but in this case, I think the market negativity is way bigger than the real risks. The main risks are the exposure to the current war in Ukraine, affecting a sizable chunk of the company revenues, but as conflict goes on and other region sales increase the risk is mitigated. Another exposure that is worth mentioning is the exposure to China, which experienced lockdowns in 2022 and now completely reverted its COVID politics from a zero tolerance one to a kind of free for all with unknown consequences. I believe the biggest risk of all is the company ability to execute on its savings plan and keep the impact from external headwinds low. All these risks are mitigated by the company solid financial position with $57 million in cash which allows the company to weather some possible storms. From a return perspective, management has been active in trying to reward shareholders either through a special dividend, paid in 2021, or a buyback program for $30 million worth of stock approved in May 2022.

In my opinion, the setup in NATR is really good. First there’s a declining stock due to external headwinds and temporary problems, second there’s a management team which appears to have a credible plan to address the problem, third there is 30% of the market cap in cash and last but not least there is a management team trying to reward shareholders. All in all, I like my chances, let’s go!