Don't Fall For Herbalife's Disastrous Numbers Hidden In Plain Sight

Jul.29.14 | About: Herbalife Ltd. (HLF)


Herbalife's net income took a dive.

EPS is only "up" through active company management.

Even USA Today got duped at first.

Here goes Herbalife (NYSE:HLF) again, only this time is worse. Three months ago I criticized Herbalife for reporting non-GAAP earnings that took out legal, investigation, and even what I deemed as marketing expenses. Herbalife has been spending a bundle fighting back against Ackman through its own marketing campaign - not in a courtroom. I argued then and I argue now that these are very real expenses in part designed to help keep and retain distributors and sell products. These are very real ongoing expenses.

Monday, Herbalife reported its fiscal second quarter results and played even more games with the numbers. Right at the top of the press release in bold letters states EPS was up 10%. Hurray! Doesn't it looks great even if it missed analyst estimates a little? In fact, it looked so convincing at first that USA Today jumped the gun and reported:

Herbalife earnings up 10%. An Ackman knockout?

It then went on to state,

"Hedge fund manager Bill Ackman's short bet against Herbalife may have received its own death blow Monday after the nutritional products marketer posted robust second-quarter earnings results"

Then somebody at USA Today realized he or she had been duped, pulled the story, and changed it to a bearish opposite version.

The reality is the only reason EPS was up at all was due to the massive, unsustainable, enormous buyback of shares in the open market that lowered the share count. On a GAAP basis (which is a closer reflection of what really happened in my opinion), net incomes was plunged 17%. Even on an adjusted non-GAAP net income slipped 6.2%.

The bull argument has always been that if the investigations clear up, Herbalife has huge earnings and growth and deserves a growth premium. Now what? Negatively growing earnings doesn't get a growth premium. They fundamentally tend to trade with P/E ratios under 10. I would argue that Herbalife now trades without the risks of the various ongoing investigations priced into the stock.

What's worse is Herbalife had to have known the quarter was going to be disappointing and the stock would go down yet it decided to spend huge sums of vital shareholder money to what seems like it was an attempt to manage the stock price and more-so manage the earnings per share figure. If the company had waited it could have likely bought more shares back for cheaper.

Average share price repurchase was in the $59 range. A significant chunk of April's trading volume was just Herbalife alone doing the buying. The whole thing sounds worse than what the Fed has been criticized for artificially propping up treasuries by using the taxpayers' credit card. Only in this case, it's the Herbalife shareholders' credit card.

Having EPS "up" due solely to a one-time, unrepeatable, stock buyback is the same mathematical fallacy as paying a one-time huge special dividend then bragging about the dividend yield. Herbalife, the business, failed to achieve earnings growth for the quarter. Don't fall for it.

Disclosure: The author is short HLF. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I also have both put and call options in Herbalife stock.