Nutritional Gains

03/10/2006 12:00 am EST

Focus:

Nancy Zambell

Editor, Wall Street's Best Investments and Wall Street's Best Dividend Stocks

Nancy Zambell has a straightforward formula for finding successful companies, explaining, "I want companies that are undiscovered, undervalued, and with a simple, yet very profitable concept." Here, she looks at a nutritional play to supplement one’s portfolio.

"USANA Health Sciences (USNA NASDAQ) is a small-cap company with superb growth and tremendous potential. Dr. Myron W. Wentz, a pioneer in cell-culture technology, became world-famous for developing the Epstein-Barr virus assay, still the gold standard for diagnosing that virus. During this work, Dr. Wentz had to grow healthy, functioning cells in order to replicate viruses so that he could create assays to diagnose them. Along the way, he found that by giving the cells the right nutrients, he could keep them healthy indefinitely.

"After almost 20 years in the field, Dr. Wentz launched USANA in 1992 with one central theme: using nutrition to correct essential nutrient deficiencies, as a way to combat these diseases. And based on the science of cell-culture, he has created a very nice niche that has wide appeal especially as life spans are growing longer and we baby boomers want to live those extra years in the best health we can muster.

"USANA's nutritional line of products account for some 82% of the company's annual revenues. Its product line includes comprehensive vitamins, antioxidants, and mineral formulations with more than 40 active ingredients. It offers vitamin and nutritional supplements as well as  personal care items that provide topical nourishment, moisturization, and protection for skin and hair. And something that I really likedespecially since I am allergic to many popular skin products is that USANA doesn't use any chemical preservatives.

"Network marketing is the key to USANA's selling success. It sells its products to more than 160,000 customers in the US, Canada, Australia, New Zealand, Hong Kong, Japan, Taiwan, South Korea, Singapore, the UK, Mexico, and the Netherlands. Its growing network of home-based distributors who sell products directly to customers, as well as the company's expanding foundation of preferred customers. In addition, its has built a very nice, growing business in manufacturing premium personal care products for private-brand customers. This segment accounts for some 77% of the company's personal care line revenues.

"Record results for 2005 are a sign of good things to come. For the full year, sales set a record, rising 20.1% to $327.7 million, while earnings soared 26.7%, to $1.98. For the past three years, the company's growth has been sterling, with sales expanding by 34.8%, and earnings per share rising by 68.7%. And USANA's prospects for 2006 are healthy. The company expects sales and earnings growth of 15-20% for the year, which should lead to a continued march to handsome price appreciation.

"USANA's financials are strong, with margins that handily beat its peers, no debt to speak of, and superb operating cash flow all fabulous advantages that give the company endless potential for growth. Even without the company's stupendous growth prospects, the shares are undervalued, in comparison to its competition, and to its own trading history. Add in the potential for sales and earnings expansion, and you have a recipe for excellent price appreciation. Buy up to $44.50, with a mental stop-loss 20% less than your purchase price. My target price is $58."

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