Herbalife (HLF) has a few potential catalysts and strong support from the analyst community. It has a Zacks Rank of #2 (Buy) and is the Bull of the Day today.
Herbalife Beats Estimates in 29 Straight Quarters
Herbalife has topped the Zacks Consensus Estimate in each of the last 29 quarters which is a pretty unique accomplishment.
The last two beats were $0.22 and $0.27 -- but put in better perspective when you look at the percentage surprise. The June 2013 quarter came in 18.5% ahead of expectations and the September 2013 quarter was 23.7% ahead of analysts’ estimates. Those are some pretty big beats.
Herbalife is a network marketing company that sells weight management, nutritional supplements, energy, sports and fitness, and personal care products worldwide. Herbalife offers its products through retail stores, sales representatives, sales officers, and independent service providers. The company was founded in 1980 and is based in Grand Cayman, the Cayman Islands.
Herbalife the target of short seller Bill Ackman
In a late-December 2011 conference, Bill Ackman disclosed that he was short approximately 20 million shares of Herbalife. The total short interest as of the end of December was approximately 37 million shares. Ackman asserts that the company is nothing short of a pyramid scheme and will end up at $0.00. To further substantiate this claim, Ackman needs the FTC to investigate the company and despite recent rumors and Freedom of Information Acts, there has been no such investigation.
In early January, Dan Loeb's hedge fund Third Point filed a 13G which stated it acquired 8.9 million shares and the stock officially became a battleground stock. It wasn't long after that point that Carl Icahn became involved as well and the billionaires went at it on live television.
More recently, the CEO of POST also threw his hat in the ring and bought a 5% position in the company. He later added to his position and switch his investment from a passive stake to a more activist role. As an operator in the space and having done his own due diligence including becoming a HLF distributor, the bets are piling up against Bill Ackman.
Herbalife Sees Estimates Moving Higher
Estimates for Herbalife have been rising of late. The Zacks Consensus Estimate for 2013 for HLF stood at $4.66 as of February 2013. By June of 2013, the consensus had risen to $4.81. The consensus has since moved higher to $4.99 in September and is now at $5.25.
Over the same time period estimates for 2014 have moved from $5.40 to $5.52 and are now at $5.77.
The company recently received a clean re-audit after an insider trading scandal forced the previous auditor to resign. With this clean audit, it is likely that the company will call on the debt market to raise capital with the intention of buying back shares and or increasing the dividend. Both or either move would result in a short squeeze, as there are still 21M shares sold short.
Pershing Square recently covered a portion of its short position and switched to puts, a strategy that limits risk but now includes a deadline before the buts expire worthless. It is not clear who has the other side of the put trade.
Previous Bull Of the Day
On October 2, 2013 Herbalife was written up as the bull of the day. This came just prior to Pershing Square covering 8 million shares and switching into puts. The stock closed at $73.09 that day and the day before publication of this article, the stock touched $80.70. That is a move of more than 10%.
Herbalife trades at some very attractive multiples. The trailing twelve months PE of 15x is well below the 21x industry average. Similarly, the 13x forward PE multiple is also trading at a discount to the 16x industry average. Price to sales multiple of 1.7x has the company trading at a premium to the industry average of 0.5x. One metric I like to focus on is the net margin and HLF sports an 11.3% net vs a 3.8% industry average. Given the low multiples and substantially higher net margin than the industry, it is apparent that the valuation is still depressed based on the resistance from short sellers as investors are still cautious on the idea of the stock being a pyramid scheme.
A quick look at the price and consensus chart shows that despite claims of a pyramid scheme and numerous bear attacks on its multi-level marketing model, the company continues to get higher and higher earnings estimates. The gaps between the colored lines show the continued growth in earnings, just what growth investors want to see.
I am long HLF in my trading and IRA account. In fact, it’s the only stock I own.
Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.
HERBALIFE LTD: Free Stock Analysis Report (email registration required)