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Don't Buy Herbalife's Inferior Products Or Its Stock

|About: Herbalife Nutrition Ltd. (HLF)
Summary

Herbalife sells products that are overpriced.

This makes it difficult for distributors to sell them.

This is this entire point of the MLM scheme. Distributors sell these products to their friends and family.

This is the only way such high price points could be reached. Eventually this scheme will run its course.

Therefore I am recommending avoiding Herbalife stock.

This article will leave aside the legality of Herbalife's (NYSE:HLF) business model. It will also ignore the fact that it is trying to expand its business to poor countries which sounds strange to me at first glance since it sells weight-loss shakes and protein bars. The article will instead focus on Herbalife's claim that it sells these products to be consumed. If they are being bought to be consumed in the way other protein shakes and meal supplements are, then it makes sense to do a side by side comparison to determine how good the products are. Keep in mind that I am not supporting the business model that Herbalife uses. I am simply doing a different type of analysis since the FTC case has already been discussed at great length. Weight loss is probably the industry with the most miss-information as overweight individuals are desperate to lose weight and are sometimes in a situation where they are willing to try anything. I am going to explain in this article why Herbalife's products are not that great especially considering their high prices.

When I graduated high school I was sent a letter about a "fantastic opportunity" to make money. It ended up being a multilevel marketing business involved with selling knives. After doing some research on the internet, I realized that the knives that the firm wanted us to sell were very expensive. The concept that being highly motivated would drive success was thrown out the window; in reality selling very expensive knives to anyone outside one's immediate family is almost impossible. The same principle that selling products that are priced too high is almost impossible applies to Herbalife. I will be looking at some product comparisons in order to prove that its products are being sold at too high a price point. The fact that its shakes and other health products are too expensive may explain why 73% of Herbalife distributors get paid $1,000 or less. The way these types of businesses are set up, it makes perfect sense to charge higher than normal market values. If Herbalife was just going to charge regular prices, it would simply sell its products in stores. Since its distributors are mostly selling to their friends and family, they will be able to sell it for higher prices. If a distributor is really successful it is the best of both worlds for Herbalife because it gets the high margins and increased volume that a traditional sales model would give it.

Herbalife meal replacement shakes can cost you about $150 per month. If this sounds like an outrageous price to you, you'd be right. I looked at the Formula 1 meal replacement shake and compared to the Naturade Total Soy Vanilla product. On Amazon the Formula 1 French Vanilla canister, which is 750 grams, costs $34.99, while the Naturade sells for $14.99 for 540 grams. This means that the Naturade product is 40% cheaper than the Herbalife one. Both products have the same first two ingredients which are soy protein isolate and fructose. The Naturade product has 13 grams of protein compared to Formula 1's 9 grams. Both products have an assortment of vitamins with Naturade having slightly more in all categories.

This comparison favoring Naturade is not surprising because Naturade competes on the store shelves against other products, while Herbalife uses a direct selling method which revolves around sales results being determined by the tenacity of the sales person. The theme that I am trying to portray is that the ability to sell a product that is in inferior and costs more cannot last forever. The only reason why the firm sells any products at all is because of the direct selling model. I would not want to invest in a company that relies on this because it is a difficult task to sell these shakes when they can be gotten at Vitamin Shoppe at a lower price. There will always be people willing to try weight loss products, even if they are overpriced. However, I like to invest in firms that have a compelling value proposition instead of ones that try and fool its customers.

Formula 2 is the multivitamin that Herbalife sells. LabDoor analyzed the 75 best selling vitamin brands. The firm did 1,200 chemistry assays on these vitamins. According to its website Herbalife's Formula 2 came in 54th pace in terms of quality, receiving a B- grade. In terms of value the vitamin came in 42nd place. These scientific tests show that Herbalife vitamins do not offer a significant value proposition. If I was investing in firm, I would want it to have highly rated products. This supports the thesis that Herbalife does not offer great products. Having subpar products makes it difficult to sell them, no matter if you are in a poor country or in America.

The Liftoff energy powder is the next product that I am going to focus on. This product's packaging focuses on having panax ginseng, L-taurine, and caffeine. These are the same ingredients that are in Monster Energy drinks. A pack of 10 powders costs $33 on Amazon. This compares to a 24 pack of 16 ounce Monster cans which cost $34.75. The B vitamins that are in the powder make it similar to 5 Hour Energy. 12 bottles of 5 Hour Energy cost $22.49 on Amazon. There is no question in my mind that Liftoff would not be able to differentiate itself at that price point if it sold on store shelves. This is yet another product that has a high cost because it is being sold in a multilevel marketing scheme. Selling these types of non-competitive products make it difficult to see how Herbalife can grow its earnings in the long-term.

The final example I will offer is the Herbalife aloe soothing gel. A 6.7 ounce bottle sells for $18.99 on Amazon. A similar gel which is paraben free like Herbalife's product sells for $7.99 for an 8 ounce bottle. Keep in mind that the fact that Herbalife's products are being sold online hurts the direct sellers. This is why you can see desperate distributors claiming that it is illegal to sell these products in the reviews. You can also see claims that the Amazon products may be of bad quality even though the product clearly has rave reviews.

I have proven in this article that Herbalife products simply are not competitive in marketplace. Herbalife has been attempting to make the argument that it sells its products for consumption. If this is true, then it has a lot to worry about because they are overpriced compared to similar products. Regardless of whether Herbalife gets shut down by the FTC, it is clear that investors should steer clear the stock because it sells inferior products. Herbalife is similar to the multi-level marketing knife company that contacted me a few years ago. Even as a teenager I was smart enough to avoid working for the company. You should make the same decision regarding Herbalife stock.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.