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Walter Lu

Walter Lu
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  • Dr. Herbalife Or How I Learned To Stop Worrying And Tried To Value It [View article]
    Sorry, I think I edited my post after you saw it. Mostly in the first paragraph. Please take a look again.

    One way you can think about it is if you assume someone bought the entire company, paid back the debt, and pocketed the cash, how much the entire transaction would cost them. This would be the market cap + debt - cash, which is what you used. If they did this, what would the income stream look like from the company? Well, since they paid back the debt, they would no longer have to pay interest. So that's why you add interest back to FCF.

    On the other hand, if you just use FCF as it is, which subtracts interest payments for debt and adds interest received for cash, then there's no need to add debt and subtract cash. Doing so would basically double-count them.

    And as mentioned above, you'd have to use different costs of capital for each method. The first one basically assumes a "clean slate" although the second method is closer to reality since if a company can get cheap financing (or is paying too much), that will affect the value of the company.
    May 15, 2015. 11:17 AM | 4 Likes Like |Link to Comment
  • Dr. Herbalife Or How I Learned To Stop Worrying And Tried To Value It [View article]
    You should not add cash and subtract debt at the end, since you are using the WACC of equity and debt. Otherwise, you need to use the cost of equity and add the interest expense back to FCF. That is what it would look like if you assumed equity holders paid back all the debt and pocketed the cash. Doing so would raise FCF/revenue to over 11%.

    Also your 1% terminal growth rate is probably too low. By default, I'd expect a company to at least grow at the rate of inflation, historically about 3%. If you are expecting low inflation in the future, then you cannot use the historical S&P 500 CAGR since that is not inflation-adjusted, so then your discount rate is too high.
    May 14, 2015. 08:00 PM | 4 Likes Like |Link to Comment
  • Herbalife: The Eve Of Destruction [View article]
    User 20505811, mind explaining it to me here or link me to an explanation?
    Mar 26, 2015. 03:01 PM | 5 Likes Like |Link to Comment
  • Herbalife: The Eve Of Destruction [View article]
    How is consuming in a nutrition club any worse than consuming at home?
    Mar 26, 2015. 03:01 PM | 7 Likes Like |Link to Comment
  • Herbalife: The Eve Of Destruction [View article]
    A major hole in the short thesis is revealed when you consider HLF's generous return policy. How do distributors lose tens of thousands of dollars when they can simply mail back unsold inventory for a full refund, including shipping? Distributors must acknowledge that they are aware of the return policy when they sign up so ignorance isn't an excuse. How does a pyramid scheme survive if all the victims at the bottom are getting their money back? How do you reconcile their very low return rate of < 1%? Shortsellers have said before that they believe HLF shakes are not actually being consumed. You mean to tell me that 99% of inventory is left rotting in basements and garages instead of being returned? I've yet to hear one convincing explanation for this paradox.
    Mar 26, 2015. 01:27 PM | 16 Likes Like |Link to Comment
  • Ackman's Gravitas Statistically Provable: Look Out Below [View article]
    What about the investors on the other side? Icahn, Soros, and Stiritz have even better track records than Ackman. Less well-known longs like Kerrisdale Capital's Sahm Adrangi and Bronte Capital's John Hempton also have very impressive track records. "Statistically" it's much more likely that one superinvestor is wrong than many. Ackman has had some spectacular blowups in the past, such as his fund that lost everything buying call options on Target. Herbalife won't be his first major mistake. And don't kid yourself, being bearish on HLF is definitely not a contrarian view. 35% short interest and the number of bears on SA and Twitter make it pretty obvious that HLF is one of the LEAST contrarian shorts in the market today.
    Aug 14, 2014. 02:58 AM | 11 Likes Like |Link to Comment
  • Herbalife: POOF! There Goes The Bull Case [View article]
    Analysts project buybacks when making their estimates...
    Jul 29, 2014. 02:06 PM | Likes Like |Link to Comment
  • Herbalife: POOF! There Goes The Bull Case [View article]
    The purpose of a stock buyback isn't to boost the price in the short term. It's actually better if the stock continues to fall as they buy back stock, giving them a cheaper price. A buyback creates long-term value if they can buy back stock under intrinsic value. Think of a buyback as buying any other stock. For example if HLF buys KO stock when it's undervalued, they will make money in the long term. Same as when it buys its own stock.
    Jul 29, 2014. 02:05 PM | 1 Like Like |Link to Comment
  • Should Weyerhaeuser Shareholders Tender For The WRECO/TRI Pointe Spin-Off? [View article]
    Just got my shares today.
    Jul 10, 2014. 01:24 AM | Likes Like |Link to Comment
  • Should Weyerhaeuser Shareholders Tender For The WRECO/TRI Pointe Spin-Off? [View article]
    If I understand correctly, there won't be buying pressure from short covering in this case because their shorts will be offset by their new TPH shares.
    Jun 24, 2014. 05:12 PM | Likes Like |Link to Comment
  • Why Herbalife Observers Still Don't Get It; Herbalife Will Be Shut Down [View article]
    Those who believe the majority of Herbalife's revenues and earnings come from scamming distributors at the bottom of the pyramid should consider this refund policy a very big deal, as it offers a way for the victims to "unscam" themselves and potentially destroy the pyramid scheme.

    One of the following have to be true: 1) The refund is no good - that is, Herbalife isn't actually refunding anyone, or 2) victims are not using the refund policy even though it is available to them and would get their money back, either because they don't know about it or are too lazy, or 3) Herbalife honors the refund policy and revenue and earnings subsequently collapse, or 4) Herbalife is not a pyramid scheme.

    All of them should be easily verifiable. 1 seems unlikely as that would clearly be illegal and would be punished immediately. It would be pretty idiotic of Herbalife to tout their refund policy only to renege on it. 2 is possible but unlikely. Herbalife requires distributors to acknowledge the refund policy before signing up, and if distributors are in the hole for 5 figures, returning product should be the first thing they try to get their money back. I would be interested in how many victims in Ackman's documentary tried to return their unsold product and what their experience was. 3 is obvious. This policy has been in place for a while but it's actually not important how long, because let's assume it just went into effect today. Bears would have to expect an imminent collapse in revenue and earnings. If none of these three possibilities are true, then the only remaining conclusion is that Herbalife is not a pyramid scheme.
    May 8, 2014. 01:11 PM | 5 Likes Like |Link to Comment
  • Why Herbalife Observers Still Don't Get It; Herbalife Will Be Shut Down [View article]
    Will a short please explain to me how Herbalife can offer a 12-month full refund for unsold product and still function as a pyramid scheme?
    May 8, 2014. 11:01 AM | 1 Like Like |Link to Comment
  • Why Herbalife Observers Still Don't Get It; Herbalife Will Be Shut Down [View article]
    Worst case scenario: the FTC shuts down Herbalife's US business, but then shorts finally realize that 80% of revenue comes from outside the US and considering that little inconvenient fact, how ridiculous Ackman's claim is that he will "short it to zero." Regulators and customers in Asia and South America continue giving zero shits about what happens to the US business and the stock breaks $100.

    The likely scenario: the FTC gives Herbalife a slap on the wrist and the stock rockets past $200 as it dawns on the shorts that the company is already halfway private, they are stuck in a crowded theater, and now suddenly the curtains are on fire. Remember, if you're gonna panic, at least panic early. Enjoy the squeeze.
    May 8, 2014. 02:30 AM | 2 Likes Like |Link to Comment
  • hhgregg's Sell-Off Is Overdone [View article]
    Not that familiar with this company but I think there's more to the story for the bear case - short interest is 45% of float.
    Feb 7, 2014. 04:24 PM | 1 Like Like |Link to Comment
  • Exploring Mr. Stiritz's Options With Herbalife [View article]
    At what point do we shut down casinos? They offer a similar appeal: "Chances are you are going to lose money, but then again, you might be among the lucky few who get rich." But at least Herbalife helps customers lose weight and live healthier lifestyles, which cannot be said about casinos.

    What about cigarette companies? Here is their value proposition: "We will charge you exorbitant prices in return for getting you addicted to a habit that will poison you for the rest of your life. And it will probably kill you." Does it have any redeeming qualities? They don't even offer people the upside of becoming a millionaire. Why don't we see Ackman on a crusade against Philip Morris? Herbalife and MLMs in general are relatively benign.

    And I'm sure people realize that the vast majority of startup businesses fail. You don't see anyone complaining about that though. Because welcome to capitalism, where people have the freedom to take on risk if they choose to, and a lot of them will lose. Starting an Herbalife distribution business is no different in that sense and I believe the majority of distributors are cognizant of that fact going in.
    Jan 31, 2014. 04:02 PM | 2 Likes Like |Link to Comment
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