Roger Theunissen's  Instablog

HLF seems to me a good stock in a promising industry. The Margin of Safety (MoS) for this stock is not as big as for some other stocks, but I think there is some. A thorough look at the statements is definitely needed for this stock. I think this stock could be a nice addition for every portfolio.

Let's first look at valuation. I believe that the Margin of Safety is low is because of the book value. The firm has a high p/b ratio (4.85) and no tangible book value. A moderate price to tangible book value would give this stock a lot more safety. However, I think a thorough analysis of p/e could justify the term undervaluation for HLF. Current p/e is around 6, but the prospects are a bit less than previous years. Estimates for the coming years are: $2.83(2009) and $3.12(2010). The volatility of these estimates is quite low, giving them more value (and also MoS). Assuming the estimate of $3.12 for 2010, with a low estimate of $2.86, I see the HLF share going to $30 when sentiment improves. For the short run I would give a target of $25, but investors are still nervous. 

To judge the financial strength a thorough analysis of the statements is required. The quick ratio is a bit too low (0.87), but current ratio is sufficient (1.21). Debt/equity (1.45) could be lower. These 3 ratios are a bit mixed, and we need a deeper look into the statements. The cash position of $150 million is to me sufficient. HLF kept this position between 150-200 million for the last few years. The cashflow statement looks a bit tricky at first, because we see recent cash outflows. But we can relax this concern for two reasons. First the outflows are not that high ($36.6 million in 2008) versus the cash position of 150 million. Second, you should check the outflows. We see that $170 million went to retirement of debt and stock repurchase. Actually HLF is improving the financial strength AND rewarding investors. The latter can be detected by the constant decline in outstanding shares (65.7 million shares in 2008 versus 72.7 million shares in 2007).

Finally, a word about the company itself. HLF is focused on the health of people with various products. I think this becomes a trend for the coming years, as people become more aware of their personal health. We already see comparable developments in the growing sales of vitamin supplements of many nutritional firms (another example is the dutch firm Koninklijke DSM). 

Concluding I think HLF could be a nice addition to many portfolios. In my analysis above I showed why HLF is valued too low. I showed that financial strength is good (and improving), while HLF also tries to reward investors (share repurchase). Beside these repurchases the dividend of the firm is decent (3-4%). The bad p/b ratio reduces the MoS enormous. But I think with a thorough analysis you can see that this stock has potential. 

Disclosure: I&nbs... long HLF in my stock portfolio on kaChing.