While analyzing financials, charts, 10Ks, and ratios such as PEG, PE, etc. are basic to making an investment decision, I believe it's also helpful to look into some of the non-financial factors that make a company tick. Thus, in the following article I've attempted to bring forth some of these factors relating to Herbalife (HLF) and the ongoing saga that's been headline news. I trust readers will find these insights helpful.
Of course, Act One of the show was the dramatic announcement by Bill Ackman (Founder of Pershing) that HLF was a "scam" and a pyramid scheme, and it should be put out of business. The end point for Mr. Ackman is the projection that HLF stock will go to ZERO. He's bet a billion dollars of his funds money by shorting some 20,000,000 shares of HLF, and the drama builds daily.
Churches Don't Go Broke
Here's an interesting thought: The only difference between a Church and a well-run Network Marketing Company like HLF is that the latter pays taxes and the former is tax exempt. It's this point that's often overlooked by critics of Multi-Level Marketing companies.
Surely, it's been totally ignored by the charismatic Bill Ackman, and now the world's famous short-seller of HLF stock. Here's what I mean: There's the human factor of evangelical fervor embraced by distributors, employees and cutomers of most MLM companies. To opine as to whether they're right or wrong is inconsequential because this fervor clearly works!
While many may find the ubiquitous evangelical fervor distasteful, amateurish or downright obnoxious, it draws millions of people, worldwide, into the business opportunity and products of MLM companies. This reality is a fact and it's incontestable.
Like a pep-talk in the locker room before a championship football game, the MLM fervor motivates distributors, attracts new people into the business, and convinces new customers to give the products a try. Growth can become meteoric.
These dynamics in a well run company are factors really to be reckoned with. They virtually guarantee growth. With good financial management and a good product line, increasing profits can also become virtually guaranteed year after year. If one looks at HLF's financial history, I think it's abundantly fair to say that the company is well-run and it's very shareholder friendly.
Consistent Organic Growth At Will
When a company like HLF has a couple million distributors and a new product is introduced, it's a recipe for a significant and immediate surge in sales. Introducing a few new products per year can have an enormous impact since distributors are inclined to try them out. This scenario can also be a recipe for assured long-term growth. It's simple and it works.
Amway, for example, has been around for some 52 years, and continues to grow and profit. Over the years their product line has grown from a few items to hundreds of items. Sales of around $11 billion are generated by their 3,000,000 independent distributors, and they operate in more than 100 countries and territories around the globe. If they introduce a new item and the active distributors all buy a few units, it's a big number. Of course, the same holds true for HLF.
In addition, the efficiency and purity of the one-on-one selling strategy of independent distributors is enormously cost effective for the company, and it eliminates a host of cost factors that must be borne by companies using more traditional methods of distribution.
Overpriced Products That Sell Create Profits...Not Bankruptcies
Mr. Ackman and others have attacked HLF in a variety of ways including claims that the HLF products are overpriced. My view is that retail pricing is a function of the free market.
If the products were so "overpriced" people wouldn't buy them. While HLF prices may be higher for similar products than one could find at Walmart or Costco, one must consider the intangible value of the support structure that Independent Distributors provide to customers.
Throughout our economy, pricing is all over the place in virtually every market sector. Here's an example in communications that epitomizes extraordinary price discrepancies, yet no one complains of price gouging: Vonage offers unlimited international calling (on a computer) for around $26.00+ per month and Magic Jack is $19.95 per year.
The Pyramid Scheme Issue
We know that HLF has been in business 32 years. It's my view that the suggestion of a 32 year FTC "coma" is simply absurd. The applicable statutory regulations are quite clear, they haven't changed much over the years, and HLF has always maintained cadres of lawyers from the most powerful law firms to make certain that compliance is not an issue.
Attacks on HLF go back nearly 30 years to 1985 and have centered upon both their business model and their products. In May of that year, Mark Hughes, the young and charismatic Founder of HLF was called before Congress to answer complaints alleging that Herbalife product users had suffered illness and death. The U.S. Senate subcommittee called upon nutrition experts and some were critical of Herbalife products. When confronted with the testimony of these experts, Hughes response was: "If they're such experts in weight loss, why are they all so fat?"
If there was ever a time that the all powerful had motivation to put HLF out of business, it was in 1985. They didn't and couldn't, and HLF has thrived since then.
The Short Squeeze
Based upon Mr. Ackman's public comments that Pershing is short more than 20 million shares, it would appear that Pershing's position is more than 80% of the market's entire short.
For those investors considering joining the bear raid, perhaps they should consider the following:
√ On Thursday (1/17/2013) HLF Announced results for 4th Quarter were Above Expectations
√ On Thursday (1/17/2013) HLF Announced it will commence it's Share Buy-Back Program of 428 Million Shares
√ On Wednesday (1/16/2013) Carl Icahn, activist investor, announced taking a stake in HLF
√ The Next Ex-Dividend Date is 2/08/2013 (which can be costly for shorts who are obligated to pay the dividend to the party that lent the stock)
√ Considering the present short interest, it will become increasingly difficult to find shares to short.
√ Dan Loeb who runs the $4.5 Billion Third Point LLC Fund announced that's he's is going long HLF. Commenting on this news, Jim Cramer stated: "Loeb is going to crush Ackman."
Significant Operating Ratios
Source: Scottrade Research
|Herbalife Significant Metrics|
|Closing Price 1/16/2013||$45.06|
|Annual Dividend Per Share||$1.20|
|Next Ex-Dividend Date||02/08/13|
|52 Week High||$73.00|
|52 Week Low||$24.24|
|5 Year Growth Rate||25.30%|
|Current Year Est. EPS||$4.03|
|Next Year Est. EPS||$5.19|
|Compiled by Craig Van Pelt|
Based on all of the foregoing, a short position in HLF is a dangerous position to be in. I'd much rather be long. While the HLF/Ackman/Icahn/Loeb soap opera is amusing and high stakes, my belief is that HLF will weather the storm, continue to prosper, and the shorts will ultimately get crushed. The risk/reward of being short simply doesn't make sense.
In addition, if any governmental investigation should come about, it could very likely be an investigation into Pershing and the short brigade... not HLF.