Investors, on the long side, in Herbalife (NYSE:HLF) woke up to some very good news on February 3rd, with the announcement of a significant increase in Herbalife's stock repurchase program. Herbalife has only 101 million shares outstanding with a few major stockholders subtracting huge chunks from the float.
101 Million Shares Outstanding
-16, 966, 485 shares owned by Icahn Associates (NYSE:IEP)
-5,039,175 shares owned by Soros Fund
-2,030,970 shares owned by BlackRock (NYSE:BLK)
-7,484,804 shares owned by William Stiritz
= 69,478,566 shares available
The total shares available will be less than the 69.4 million unless one or more of the major holders decides to start selling shares.
Herbalife still has $653 million available from their previous share repurchase plan and is now adding an additional $500 million to the authorization. That's $1.153 billion dollars available to still buy back stock at a current price in the low $60s. Herbalife could buy over 17 million shares, at a price of $65 or less, from a float of less than 70 million shares. I would not want to be on the short side of that.
And There is More Good News
Herbalife also announced its 4th quarter outlook would beat estimates. The earnings are still very strong, one of the reasons why many billionaires are attracted to the company, and the company is continuing to show major growth. Herbalife will be giving more details during the February 18th earning report along with the conference call being held the next day at 11am EST.
Herbalife already stated that 4th quarter earnings would be in the range of $1.26 to $1.30 per share, significantly higher than average estimates of $1.16. The stock buyback will not only accelerate earnings per share, it will also make a future leveraged buyout (LBO) even more of a possibility. Wedbush analyst, Rommel Dionisio, stated that Herbalife as more than enough cash flow to fund the buyback. After a successful buyback, especially at prices in the mid $60s, Herbalife will have even more cash flow to fund future activities; and by activities I mean growth, buybacks, and even a LBO.
Fourth quarter sales growth was impressive with an increase of 19.8% and estimated 1st quarter adjusted earnings of $1.24 to $1.28 a share. The growth in sales, cash flow, and earnings are some of the main reasons why Herbalife attracted the attention of billionaires Carl Icahn, George Soros, and William Stiritz. These sophisticated investors all see the potential for Herbalife to continue its worldwide growth and William Stiritz has expressed his desire to explore taking Herbalife private.
So on the long side, investors in Herbalife have many cards in their favor. A strong company that continues to beat earnings expectations quarter after quarter, multiple sophisticated billionaires investing in the company, a huge stock buyback, and the potential for an LBO at a much higher level than its current price.
The Short Side
The negative side of Herbalife is that Bill Ackman and others might be right and everyone in the MLM business is wrong, including Herbalife , Nu Skin (NYSE:NUS), Amway, Avon (NYSE:AVP), and Melaleuca to name a few. Ackman's target is Herbalife, but he seems to enjoy pointing out rogue distributors instead of focusing on Herbalife itself. Every business is going to have people that bring shame and Herbalife is no exception. Past distributors have made false promises to people that thought they would get rich and ultimately did not. Herbalife plainly reports the income of distributors and just like ignorance of the law is no excuse, ignorance in business is also no excuse. Being a salesman is tough work and is not something that most people will be able to do profitably. There is risk with any business and most new businesses do fail. Just because a new distributor fails to make significant income with Herbalife does not constitute fraud by the company. Herbalife offers an opportunity with no guarantees of success, but they do offer a money back guarantee so risk is limited.
Herbalife is doing great as a business with strong revenues and growth. It continues to beat analysts' estimates and has a major stock buyback plan in place. Investors should weight the upside potential to the risks that Bill Ackman might be right and the entire business will be investigated and ultimately shut down by the government. The FTC went after Amway, back in 1975, for reasons similar to those proposed by Ackman, but ultimately the FTC lost and Amway is still a thriving business. I believe the same will hold true with Herbalife and it will continue to grow with few or minor changes to its business plan.
Disclosure: I am long HLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.