Herbalife: Einhorn Brings Shares To Its Knees

| About: Herbalife Ltd. (HLF)

Shares of Herbalife (NYSE:HLF) ended the day 20% lower after prominent hedge fund manager David Einhorn raised questions about accounting disclosures of the company. Shares fell up to 26% intra-day as the allegations hit Herbalife's shares hard.

Wednesday's Allegations

Prominent hedge fund manager David Einhorn asked yesterday on a conference call with analysts and investors why Herbalife stopped providing information about its distributors in its filings. Einhorn's concern started after Herbalife no longer provided information about distributor groups. The decision was made by Herbalife's Chief Financial Officer John DeSimone, who took on his role in January 2010.

DeSimone decided to no longer provide information about distributor groups as it is "not valuable information to the business or investors". On the call DeSimone said that he could provide similar breakouts in the future in a reaction to Einhorn's concerns. Einhorn reacted by calling such additional information as being "helpful". He asked for a breakdown of sales to Herbalife's distributors and its consumers. Furthermore, Einhorn was particularly interested in financial incentives given by Herbalife to its supervisors when they sign up new distribution deals.


David Einhorn, the President of his own firm Greenlight Capital, has focused his investment strategy on accounting practices of companies and has often initiated prominent short positions. He became well known when he shorted Lehman Brothers as he thought the bank was undercapitalized and did not trust the valuation of credit default obligations. The bet on Lehman Brothers did pay off and made Einhorn a powerful man on the street.

Last year shares of Green Mountain Coffee Roasters (NASDAQ:GMCR) fell 10% in October on a single day after Einhorn made inquiries about its disclosure practices and have fallen some 40% ever since.

Wednesday's market impact clearly shows the power of Einhorn in the market. His inquiries triggered a 20% sell-off in Herbalife's shares and prompted the company to come with a response. "Mr. Einhorn's questions raised no new subjects or concerns, and we are confident in our financials, our disclosures and our network marketing business method", according to Herbalife.

First Quarter Results

Tuesday the company published its first quarter results after which shares ended flat around $70 per share. First quarter profits increased 23% to $108 million as revenues increased 21% to $964 million. On the back of the strong results the company raised its full year earnings per share guidance of $3.40-$3.60 to $3.58-$3.74.


Herbalife ended its first quarter of 2012 with roughly $306 million in cash and equivalents and it has some $232 million in short and long term debt outstanding for a net cash position of $74 million. After Wednesday's significant drop, shares are valued at 1.9 times annual revenues and 16 times 2011's annual earnings.

Currently the company pays a quarterly dividend of $0.30 for an annual dividend yield of 2.1%

Investment Thesis

Shares in the global networking company which sells weight management, nutritional supplements and personal care products have seen a tremendous long term rally. Shares have moved upwards from lows of $6 in 2009 to a peak of $73 in recent weeks. Despite Wednesday's significant pull back to $56 per share, shares have still returned 9% year to date.

Shares were for sale yesterday, trading at a 20% discount compared to Tuesday when the company reported strong first quarter results. If Einhorn's allegations prove to be wrong investors have an incredible opportunity to pick up a quality name at discounted levels. On the other hand, it remains largely unknown how credible Einhorn's allegations are and what the potential impact could be in case he is right.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.