What happened
Shares of Nu Skin Enterprises (NYSE: NUS) lost 20.4% in value last month, according to data from S&P Global Market Intelligence.
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Investors turned bearish on the company following an analyst downgrade on the stock, citing the investigation by the Chinese government into direct sales companies that operate in wellness products.
So what
China represents 33% of Nu Skin’s total revenue, so any disruption to that market would be detrimental to the company’s success.
China is not an easy market to navigate. Last year, the government began to crack down on several companies, especially ones involved in social media and entertainment. Recently, the Chinese government began to investigate the sales practices of companies that sell wellness products after one fatal incident involving the use of an herbal product.
However, investors should keep in mind that this isn’t the first time Nu Skin has been under China’s microscope. In 2014, the Chinese government investigated the company’s sales practices in the region, yet Nu Skin still does a lot of business in China.
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Still, anytime a company comes under greater scrutiny by China — which is notorious for its strict regulatory policies — it’s not good news. Investors are even more sensitive to this news, given the negative light shed on companies who sell wellness products.
Now what
Nu Skin is coming off a year in which revenue increased 18%, while adjusted earnings growth was 8.9%. The China news will cast a cloud over the company in the short term, but management is optimistic about 2019.
This year the company is making better use of social sharing to attract and retain sales leaders, which is crucial to the company’s success. Management is also enthusiastic about its investments in technology, particularly in migrating assets over to the cloud to build scale and other capabilities that should help Nu Skin better serve customers.
Even with the uncertainty in China, analysts expect the company to post revenue growth of 3.5% in 2019 and 5% in 2020. Analysts expect adjusted earnings per share to improve to $3.93 this year, up from $3.52 in 2018.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
