Patsky’s PicksUSANA Inc

USANA develops and manufactures nutritionals, antioxidants, weight management, and natural skin and hair care products that are distributed through the company’s network of independent distributors. The line currently consists of approximately 30 products distributed in all 50 states in the U.S. and all provinces of Canada, which currently contribute 70% and 30% of total sales, respectively.

Over the past two years, the company has aggressively built its management team in preparation for a worldwide expansion effort expected to commence in 1998 with Australia. In addition, the company made significant investments to expand manufacturing capacity and information technology in the organization during 1996, the integration of which is now essentially behind it.

Operationally, management is targeting 19% SG&A and 20% COGS. We believe the company can effectively manage its distributor incentive payout as a percentage of total sales at 44%-45% with additional adjustments like those recently made to the compensation system implemented over time.

We expect USANA to realize average growth of 25% among nutritional companies over the next three to five years through a solid product offering and market expansion plans. In addition, we expect USANA to realize operating margin expansion to 14% through SG&A leverage and tighter management of volume incentive payouts driving slightly faster earnings growth.

We believe USANA’s average growth rate is offset by its below-average profitability and limited liquidity. Therefore, we would assign the stock a multiple with a 15%-20% discount to its peer average of 18-20x forward earnings. Based on our 1999 EPS estimate of $1.65 and a forward multiple of 15-17, we believe the stock would be fairly valued at $25-$28 one year out. Rating: Buy

Matthew Patsky, CFA, is a senior VP with Adams, Harkness & Hill Inc. in Boston, an institutional brokerage firm. The information and opinions expressed herein are based on information believed to be reliable.