Profit from this Company's Booming Worldwide Customer Base


Here's a weight-loss product that helps slim bulging waistlines but can fatten your trading portfolio.

Herbalife (NYSE: HLF ) is a leading weight management company that sells diet shakes, snacks and nutritional supplements.

Nearly two-thirds of Americans currently battle obesity, and the demand for weight-loss products is growing. From 2009 to 2010, the global weight loss product market is expected to increase sales +19%, to more than $69 billion.

It's not just Americans who are trying to slim down. The World Health Organization estimates that about a third of all adults (age 14 and up) that compromise the total world population of 6.8 billion people are overweight . That means the potential market for HLF's products is roughly 1.4 billion people. In five years, the number of overweight adults is expected to increase to 2.3 billion, a growth of almost +65%.

For Herbalife, the worldwide obesity epidemic adds up to potentially large profits. The global network marketing company sells its products in 72 countries through a worldwide network of 1.9 million independent distributors.

Technically, Herbalife is appealing. The stock has been in a steady uptrend since March 2009.

In March 2010, HLF broke its major downtrend line that had been forming for more than two years, since March 2008.

And just last week the stock bullishly broke out of a second ascending triangle formation. This pattern was created by the major uptrend line from March 2009 and long-term, historical resistance near $48.

The stock is now again approaching its all-time high of $52.78, which it hit in early May 2010, after strong first-quarter results.

If HLF can pierce its upper Bollinger band, currently intersecting at $50.77, it is likely to reach its May peak and could go much higher.

Based on the measuring principle -- which is calculated by adding the height of the triangle to its break-out level -- Herbalife could eventually reach a target of roughly $71 ($48 - $25 = $23; $23 + $48 = $71).

The stock is above both the rising 10- and 30-week moving averages. The 10-week moving average acts as an initial base of support and intersects at $46.75. The 30-week moving average, which intersects at $43.56, is just above a key support level, dating back to March 2008.

The indicators are mostly bullish. MACD appears to be on the verge of giving a buy signal. The MACD histogram is ascending toward positive territory.

The relative strength index ( RSI ) has been in a major uptrend since December 2008. At 59.5, it is not highly yet overbought.

Stochastics has just given a buy signal and confirms that the stock is not overbought.

With growing worldwide demand for its weight-loss products, Herbalife shows strong future revenue and earnings growth potential.

On May 4, the company reported upbeat first-quarter 2010 results. Revenue for the period increased +18.6% to $618.6 million, compared with $521.7 million in the year-ago quarter. Higher sales volumes in the United States, particularly within the Hispanic market, drove growth.

For the upcoming second-quarter, to be reported on August 2, revenue is expected to increase +12.7% to $644.7 million, compared with $571.8 million in same period a year ago.

For the full 2010 year, the eight analysts who follow the company believe revenue will increase +11.2% to $2.6 billion, compared with $2.3 billion in the 2009 year.

By 2011, as demand for weight loss products continues to increase, revenue should grow an additional +6.5% to $2.8 billion.

Earnings growth is equally as robust. In the first-quarter of 2010, earnings increased +44% to $0.98 per share, compared with $0.68 in the first-quarter of 2009.

For the upcoming second-quarter, the company has issued upbeat earnings guidance of $0.89-$0.92 per share. This represents at least an +8% increase compared with the year-ago quarter.

For the full 2010 year, Herbalife has raised its earnings guidance to $3.80 - $3.90 per share. Management initially expected to post earnings between $3.58 - $3.70 per share. This updated estimate represents at least a +6.5% gain compared with the year-ago period. Increased sales, especially in the Asian and North American markets, are driving expected growth.

By 2011, analysts expect the company will achieve +18% earnings growth, with net profit per share reaching $4.37.

Despite strong growth projections, the company remains attractively valued. Herbalife has a trailing price-to-earnings ratio (P/E) of 14.2.

With this P/E , the company's price/earnings-to-growth ratio ( PEG ) (P/E divided by growth rate) is 0.75 (14.2/18.9). Any number under one is considered good value.

HLF's return on equity ( ROE ) is an incredible 66.3%. In comparison, the S&P's ROE is 15.0%.

The company also pays a yearly dividend of $0.80 per share. At current prices the company pays a small dividend of 1.7%.

As further evidence of the company's financial health, Herbalife recently announced a $700 million expansion to its $300 million share repurchase program. By 2014, the company plans to repurchase $1 billion of its shares. It has so far repurchased $100 million in shares. The share repurchase program should also help support the share price.

Action to Take --> Given the company's financial health, attractive valuation, strong growth outlook and positive technicals, I believe Herbalife is well positioned to go higher.

I gave Trade of the Week readers, the free weekly trading letter I co-write with trading expert Mike Turner, a heads-up on Herbalife before the market opened this week. I set my target at $62.95, although according to the measuring principle, the shares may go higher. To get further details on the trade and receive our free analysis each week, you can go here to sign up .

Chief Trading Expert
Double-Digit Trading

Disclosure: Neither Melvin Pasternak nor StreetAuthority, LLC hold positions in any securities mentioned in this article.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.

This article appears in: Investing , Stocks

Referenced Stocks: HLF , PEG , ROE , RSI

Melvin Pasternak

Melvin Pasternak

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