Herbalife - Excellent Second Quarter Proves Einhorn Wrong For Now

| About: Herbalife Ltd. (HLF)
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Shares of Herbalife (HLF) the global weight management and nutritional supplement company rallied 6% in after hours trading on Monday. The company released a favorable set of second quarter results after the close.

Second Quarter Results

Herbalife announced second quarter revenues of $1.0 billion today, up 17% compared to last year. Revenue growth was driven by a 23% increase in revenue points. Net income came in at $133.4 million, or $1.10 per share, compared to last year's earnings of $0.88 per share.

CEO and Chairman, Michael Johnson commented, "The broad strength of our business success continued throughout the second quarter with strong sales performance from each of our six regions, along with record earnings and strong cash flow."

Ever since announcing its share repurchase agreement on May 3, 2012, the company repurchased 9.2 million shares at an average price of $46.37 per share, for a total of $428 million. Following the completion of the prior $1 billion share repurchase program, the board of directors authorized a new $1 billion program expiring in five years time.

Segmental Information

The company maintained its high growth pace in North America and the Asia-Pacific region. North American sales grew 21% to $225 million. Asian-Pacific sales grew 25% to $297 million, while Chinese sales increased 50% to $77 million. The only weak point was Europe, Middle East and Africa where revenues were essentially unchanged from $162 million reported last year.


For the third quarter Herbalife is anticipating 13-15% volume growth in revenue points compared to the third quarter in 2011. Sales growth is expected to slow down to 10-12%. Herbalife sees earnings per share between $0.97-$1.01 on capital expenditures between $35 and $45 million. The earnings per share guidance is perfectly in line with analysts expectations for earnings of $0.99 per share.

Full year 2012 volume revenue points growth is expected to come in between 17 and 19%. Net sales growth will come in between 15 and 17% with diluted earnings per share coming at $3.88-$3.98. Analysts expected the company to guide for annual earnings of $3.80 per share.


Herbalife ended its second quarter with $286 million in cash and equivalents. The company aggressively boosted its long term borrowings to $555 million, resulting in a net debt position of roughly $270 million. The company aggressively repurchased shares during the quarter after a warning of prominent hedge fund manager David Einhorn send shares plunging in early May.

For the first six months of 2012, Herbalife generated total sales of $2.0 billion on which the company reported a net income of $241.5 million, or $1.98 per share. At this rate the company is on track to generate annual revenues of around $4.0 billion on which the company is on track to report earnings of almost $4.00 per share. This values the firm at 1.5 times annual revenues and roughly 13-14 times annual earnings.

Currently, Herbalife pays a quarterly dividend of $0.30 per share, for an annual dividend yield of 2.3%.

Investment Thesis

Shares of Herbalife traded largely unchanged year to date 2012 before the second quarter results announcement. Shares fell from a peak of $73 in April to levels of mid-forties after the warning of David Einhorn, but have recovered on the back of the massive share repurchase program and today's strong quarterly results.

Einhorn attacked the company regarding its disclosure details in dealing with distributors. Today the company is hurting the prominent hedge fund manager, by voting with their feet. So far, Einhorn has not reported that his fund has closed the short position in Herbalife. The company continues to aggressively repurchase its own shares, while reporting excellent operational results.

Management has successfully refuted Einhorn's allegations so far and has regained trust with investors. If Einhorn can't prove any accounting irregularities by year's end, I expect shares to approach their all time highs in a favorable market sentiment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.