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Investors in Dan Loeb's Third Point hedge fund reportedly heard little regarding the Herbalife...

Investors in Dan Loeb's Third Point hedge fund reportedly heard little regarding the Herbalife (HLF) controversy at the fund's annual meeting last night. Loeb did tell investors his first purchase of HLF was in late 2012 at around $30.
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  • Beta_Adjusted
    , contributor
    Comments (60) | Send Message
     
    I will say that if you use consensus' numbers over the next 3 years (EBITDA), and then fade to 3% by 2020, and discount cash-flows using a 10% WACC (which is high) and 2% terminal value growth rate, you get a target price of 93, or 160% upside.

     

    If you use a WACC of 15% (very high!), you get 50% upside. If you use 20% (too high), you get fair value.

     

    If you consider 2011's share buyback, you would have got a total capital return of 10%: 2.2% from dividends, 7.8% from share buyback. Assuming the same happened in 2012 (I haven't checked this: but it seems from my public data source, that they returned substantial capital ($1.057 billion!) to shareholders in the first 3 quarters of 2012 which is ~30% of today's market cap!!! so I view this number with suspicion (interim data is of lower quality than FY).

     

    If you aggressively trim consensus revenue growth back to 5% for the next 3 years and then fade rapidly to 3%, keep EBITDA margin at 18% and then fade to 15% by 2020, you still get ~30% upside on DCF using a WACC of 10% (too high).

     

    You get similar conclusions if you look at every other metric except FY1 P/Book on ~6.5x . EV/EBITDA of 5.2x, EV/FCFf of 8.4x, EV/sales of 0.9x are all too low.

     

    The short interest has also collapsed back to normal levels http://bit.ly/QovqZt so clearly the shorts no longer believe their own thesis.

     

    Bottom line: The stock appears very cheap, short of evidence to the contrary, I see no reason why it should not recover to previous levels and gain new heights. Note that I have done no research beyond reading the widely publicized commentary on this situation. Clearly, the key to valuing the company is its cashflow trajectory from here (~80% of net income, 100% of EBITDA get converted into cashflow which is good: nothing fishy here), the proportion it returns to shareholders (management seems happy to return huge quantities of cash), and topline growth/margin evolution (what is the company's footprint? I fade consensus estimates exponentially to 2% by 2020).

     

    This is not investment advice, but my spreadsheet model, based on historical, consensus, and projected data, clearly says that Herbalife is a BUY; the risk/reward is very attractive. I see no reason why the stock cannot recover back to 70 in due course, which is ~100% upside from today's levels. I'm happy to share my spreadsheet on request, which is very extensive.
    6 Feb 2013, 08:24 AM Reply Like
  • Boston_AL
    , contributor
    Comments (149) | Send Message
     
    According to Morningstar.com, in 2011 HLF repurchased $322mm into Treasury stock. Estimates for the past trailing 12 months (2012), HLF has repurchased $559mm into its Treasury.

     

    So it is not beyond reason that HLF could not repeat or expand its repurchases to somewhere within the range of $550mm - $950mm (it's approved budget for buy backs) into Treasury in 2013.

     

    Range of Assumptions:
    P/E = 10 (Conservative)
    P/E = 15 (LT Industry average)
    Buy-Back = $600mm (slight increase over 2012)
    Buy-Back = $950mm (Full approved spending allocation)
    Operating Margin = 16% (Morningstar & Yahoo! Finance)
    Average Purchase Price = $42.25/Share ($40-$45/share - D. Loeb)
    No Growth in Operating Profit = $465mm (ttm)
    Share Outstanding = 114mm (Morningstar - ttm)

     

    Scenario #1:
    $550mm/$42.25 = ~13mm shares into Treasury
    114mm - 13mm = 101mm shares outstanding
    $465mm/101mm = ~$4.60/share

     

    @P/E = 10 the market price of HLF = $46.00/share
    @P/E = 15 the market price of HLF = $69.00/share

     

    ROI on Buy Back Shares = ($46.00-$42.25)/$42.25 = 8.9%
    ROI on Buy Back Shares = ($69.00-$42.25)/$42.25 = 63.3%

     

    ROI Range = 8.9% - 63.3% verses Op. Margin of 16%

     

    Scenario #2:
    $950mm/$42.25 = ~22mm shares into Treasury
    114mm - 22mm = 92mm shares outstanding
    $465mm/92mm = ~$5.05/share

     

    @P/E = 10 the market price of HLF = $50.50/share
    @P/E = 15 the market price of HLF = $75.75/share

     

    ROI on Buy Back Shares = ($50.50-$42.25)/$42.25 = 19.5%
    ROI on Buy Back Shares = ($75.75-$42.25)/$42.25 = 79.3%

     

    ROI Range = 19.5% - 79.3% verses Op. Margin of 16%

     

    Conclusions:
    <> Going BIG on a buy back of HLF common is a more prudent response and the probability of the ROI exceeding the current Operating Margin (16%) of the business is significant verses repeating the $550mm buy back program of 2012.

     

    <> So long as Herbalife remains in business, by any rationale assumption the stock is quite cheap at $36/share today (2/6/13), and management's buy back returns above may could well be exceeded.
    6 Feb 2013, 11:48 AM Reply Like
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