Silver Linings in a Down Market

Although companies continue to struggle in the market, Wall Street still loves the earnings growth thisindustry provides.

ByAdam Ismail

The U.S. stock market has certainly had its ups and downs in recent months, with both the S&P 500 and Dow Jones Industrial Average (DJIA) reaching all-time highs in August, only to fall more than 8% in less than a month. Many of the public nutraceutical companies have had their ups and downs recently as well for a variety of reasons, al­though most are unrelated to other market woes.

Nutraceutical International (-10% since July 18th vs. -4% for DJIA)

Nutraceutical’s stock fell 16% in the space of five days in May, which likely gave many investors a scare. The culprit was a decision by the Supreme Court not to hear the company’s challenge to the FDA’s ephedra ruling. The market is not always rational, and that certainly appears to be the case in this in­stance. The ephedra product in question was never a very significant product for Nutraceutical, and in fact the company was only petitioning to be able to sell a low dose ephedra product that had already been discontinued. Presumably, the company was filing the suit for the principle of the matter and/or to gain legal clarity on a new FDA tactic. Ultimately, the market did see that the suit should not have mattered and within six days Nutraceutical’s shares were trading above the price prior to the Supreme Court decision.

The company was not so lucky in July, when its third quarter earnings did not meet the market’s expectations and its shares fell 12% in three days. As of the writing of this column, it has yet to recover. That said, the company points out that there are many bright signs in the future, as it focuses on consolidating its acquisitions from the past year and looks for further deals to grow its operations.

Usana Health Sciences (-21% since July 18th vs. -4% DJIA)

Usana has been mired in controversies since May, when an ex-convict-turned-stock-investigator issued a report accusing the company of operating a pyramid scheme. Most equity analysts agreed that a majority of the allegations were untrue, although there were some statements on the résumés of some executives at the company that were not necessarily true. In addition, in the midst of this scandal, the company’s auditor resigned. However, it did make it clear that it had no dispute with the company over its finances. Regardless, these types of events make the market nervous. Fortunately for the company, it has managed to stay on track, signing the very respected PriceWaterhouseCoopers as its new auditor. It also continues to deliver stellar earnings results, reporting 17% earnings per share growth in its second quarter.

Unfortunately, its shares fell again in early August after a Forbes article reiterated many of the previous controversies, but therein lies the good news for Usana shareholders. If the company can continue to deliver strong earnings results and these controversies subside, Usana’s shares should appreciate considerably.

NBTY (-3% since July 18th
vs. -4% DJIA)

NBTY, the largest dietary supplement company in the industry, has fared better than most during recent market turmoil. Much of the credit for this goes to the company’s management for running a tight ship—in fact, earnings at the company have generally grown consistently, and it has stated that it will require no adjustments to meet the new GMP requirements. The stock was recently upgraded by a JP Morgan analyst who noted that the company has diligently improved its margins and maintained those gains.

Although there are still concerns about the company in the mind of the market, these concerns are more related to the volatility and risks of the supplement industry in general, rather than NBTY’s business specifically. It is important to note that despite these concerns, the company’s shares have risen over 43% in the past year, so while the market may often be fickle, it still loves the earnings growth the supplement industry can provide.

What Lies Ahead for this Market

These few examples show how volatile shares have been in this sector lately, but there are many others. Mannatech remains tangled in its own set of controversies; Herbalife continues to struggle with slowing sales growth in Mexico; Nu Skin is dealing with a sluggish Japanese market and a delayed China plan; and Whole Foods recently won the fight to acquire Wild Oats—but the fight was costly: its debt has been downgraded to junk bond status as a result of the deal. Despite all of this, the fundamentals that drive this business are still there, which means brighter times may lie ahead for nutraceutical shares!NW