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HLF Pulls Back: Should You Buy?

|About:Herbalife Ltd. (HLF)

Herbalife Pulls Back: Should You Buy?

Herbalife (NYSE:HLF) is a health and personal-care producer. It rose to almost $55 over the past few months and recently has fallen over 3% the last 5 trading days. The fall has occurred because of the SEC questioning about disclosures on sales by distributors. Although these questions were warranted, the investor overreaction created a great buying opportunity.

Income Statement & Cash Flow

Let's look at its financials first. Over the past three years revenue growth has averaged 13.6% while the industry had just 1.4%. Earnings have averaged 25.2% over the same period. The ROE is 5 times the industry average at 105%. Operating margin and net margin are both higher than the industry average at 16.6% and 12.1%, respectively. The margins are about 4% higher than the industry and are sustainable because of popular products. The cash flow from operations and free cash flow have been increasing over the past 5 years. The receivables have also risen consistently over the years. This is an important relationship as it shows the cash flows are sustainable over time and have not occurred from other operations.

Balance Sheet

HLF has also been accumulating cash on the balance sheet while reducing its long-term debt load. The debt has risen over the last quarter, though, and the debt-to-equity ratio is now 2.05 from 0.36. This debt, as others covering this stock have mention, comes not from the need to fund normal operations but for share buybacks and dividend payments. I do not think this is a good idea as it seems to falsely increase the EPS and when increasing the debt load does not help investors overtime, even with such low interest rates. The quick and current ratios are at healthy levels and rising. The quick could be higher as it is sitting at 0.70 and it would be nice if it were at least 1. The operating expenses have decreased as well overtime: about 3% over 4 years. This has helped improve its profit margins by about 3% over the same period. I like to see a company both increasing profits and decreasing costs. It shows me that they understand that when growth slows they can still perform well. Also it usually keeps them ahead of competitors. I would like to see an increasing efficiency in asset turnover, inventory turnover, and cash conversion cycle, but they are increasing slowly with the higher growth. Currently they are still at competitive levels.

Valuations

The valuations are surprisingly good with such great growth numbers. Below is a table that summarizes the valuations.

Valuations

 

P/E

P/B

P/S

P/CF

PEG

HLF

13.6

20.9

1.6

12.0

0.7

Industry

19.7

4.0

1.9

13.9

---

The valuations are lower than the industry average except for P/B. P/B is not as important for a retailer as it is for one that has more asset based revenue such as banks and energy companies. The future growth looks good as well. The 5 year growth forecast is 14.3% and it is a strong buy according to most analysts following HLF. With HLF's investment decisions and business plan they should be able to meet this expected growth consistently.

Sales by Region & Product Category

HLF sells its products in 6 main regions: North America, Mexico, South & Central America, EMEA, APAC, and China. All of its sales have increased from 2010 to 2011 with large growth in emerging markets. Furthermore, all of the categories in which they sell (weight management, nutrition, fitness, etc.) have increased at least 16% over the same period. I would like to see more distribution of products since more than half are in weight management. I do like the good distribution over many regions. Even though HLF is not an emerging markets play, they stand to benefit from a variety of emerging and developed markets.

Sales by Region

 

2011 Net Sales ($M)

2010 Net Sales ($M)

Change in Net Sales (%)

North America

698.6

614.1

13.8

Mexico

436.9

334.0

30.8

South & Central America

554.4

390.4

42.0

EMEA

615.2

527.8

16.6

APAC

938.6

683.5

37.3

China

210.8

184.4

14.3

World

3,454.5

2,734.2

26.3

Sales by Product Category

 

2011 Net Sales ($M)

2010 Net Sales ($M)

Change in Net Sales (%)

Weight Management

2,158.7

1,698.9

27.1

Targeted Nutrition

789.6

629.2

25.5

Energy, Sports, Fitness

169.8

121.3

40.0

Other Nutrition

147.8

127.5

15.9

Literature, Other

188.6

157.3

19.9

Total

3,454.5

2,734.2

26.3

Summary

Herbalife is a great buy. With financials better than the industry average and sustainable growth in operations, HLF will succeed over time. HLF has sales all over the globe and in a variety of products.

Disclosure: I am long HLF.

Stocks: HLF