One month removed from a brutal pummeling of share price it's time to stop and reflect, and take a look at the post Q1 earnings call, starring David Einhorn, version of Herbalife (HLF). So we all know the story here and if you don't, it went as follows:
May 1st, 2012
Start - Herbalife CEO Michael Johnson kicks off the earnings call presentation highlighting double-digit earnings growth, with all six regions experiencing strong growth. He went on to say four of the regions, including North America, grew more than 20%.
Middle - Queue David Einhorn. A line of questioning ensues by famed hedge fund manager David Einhorn.
End - Herbalife shares finish down 20% for the day.
Okay, so that was an extreme summary of the events that took place on the call, but you get the point and HLF longs don't really want to relive that day in detail, right? Herbalife went on to lose another 6.5% on May 2nd, and another 12% on May 3rd - for a grand total spanking of 34% in three days. The drop is widely speculated to be a direct result of David Einhorn's questions. Come on, you have to make a hedge fund manager work a little harder than that to destroy a company's stock in three days.
Fundamentally, Herbalife's results presented a business exhibiting double-digit earnings growth. Moreover, it's growing over all regions. Analysts' Q1 EPS estimates were beaten by 7 cents and the EPS growth year over year at the 2012 estimate of $3.78 is about 15%. While this is a lot lower than the 3 year compound annual earnings growth rate of 33% and the 5 year growth rate of 23.5%, it's still double digits.
Wall Street usually gets excited by strong earnings growth, but not this time. This time was different. Everybody was scared. Investors couldn't keep up with the Einhorn-mania being spewed out and the negative connotations of multilevel networking in a business model, despite the fact that Herbalife has been doing it since 1980. Then there was the "what if" scenario. What if Greenlight Capital had a short position in Herbalife? Einhorn did after all predict the collapse of Lehman Brothers…
Herbalife had been on my radar for some time and I stumbled across it primarily due to its high, albeit short termed, rate of dividend growth. Herbalife began paying dividends in 2007, with an annual payout of $0.30 per share. Five years later, Herbalife is set to payout $1.20 in dividends in 2012. This is a highly respectable compound annual dividend growth rate of 24.5%. You can find an easy to use compound annual growth rate calculator here if you have need of one.
With a huge drop in share price on conference call day and not really seeing an obvious reason for the drop at that point, I pulled the trigger and bought HLF. With nerves of steel, I doubled my position on May 3rd and added more May 14th when the stock was down almost 40% from its pre-conference call highs. It was the opportunity I was waiting for and I wasn't going to let David Einhorn scare me off.
A chain reaction of good things for investors of HLF began the day of the earnings call, some in direct response by Herbalife management to the dramatic negative reaction in share price.
- Herbalife initiated a share buyback program with intent to repurchase $427.9 million worth of HLF stock. Great reason given too. Herbalife was buying the stock because it believed it was undervalued.
- Several Herbalife directors purchased a total of 15,000 HLF shares at a net cost of roughly $696,000 between May 9th and May 11th. Insiders sell shares for any number of reasons, but usually buy only if they think the stock value will rise. The $427.9 million worth of share buyback may have a say in this.
- David Einhorn made no mention of Herbalife at the Ira Sohn Investor Conference. He gets his own bullet item.
- Herbalife upgraded from Average to Buy by Caris & Company…after being downgraded by Caris & Company from Buy to Average just 8 days prior. Great call Caris & Company!
- China's Ministry of Commerce granted eight additional direct selling business licenses which, combined with previously attained licenses, allows Herbalife to sell in all 24 provinces in China. Have you checked lately? China has over 1.3 billion people.
- Herbalife is not mentioned in Greenlight Capital's Q1 performance letter. He actually gets two bullet items…
When I initially scoped this company out I liked what I saw and still do. Two key areas HLF is performing well in is strong earnings growth and a high rate of dividend increases. The current yield over 2.5% is a pretty good draw for me too.
Time will tell what kind of long-term investment Herbalife will become in my portfolio, but I believe this is a case of one investor's fears being another's great buying opportunity. HLF was on my buy list and went on sale. The company is fundamentally no different pre-conference call to post-conference call. It's just available for purchase at a much more attractive valuation.