I had my say on the Herbalife (HLF) story last November, and recent events seem to validate my contention then that both sides in this messy soap opera are selling something questionable. Bill Ackman’s attack on the company from all angles while short the stock could, I guess, be the product of concern for the people at the bottom who lose money, but as I said back then, when a hedge fund boss does or says anything most people assume it is first and foremost for financial gain. This assumption may be a little cynical, but it is not often wrong.
Do not, however, take this cynicism regarding Ackman’s motives as support for Herbalife or their business model. This is not a dispute where I take sides. It is a reminder that it is quite possible for two parties to be on opposite sides of an argument, and yet both be in the wrong. The company’s reticence in revealing actual retail sales numbers and the incredibly high turnover of “members” or whatever they are currently calling their agents (detailed at the beginning of this piece by Matt Stewart at Seeking Alpha) makes me highly suspicious.
I understand that multi level marketing (MLM) companies such as this can be a pathway to success for some people. My wife’s aunt is a very successful Mary Kay director so I have seen firsthand what can be achieved, but ultimately such companies must have actual customers.
Two of the original wave of MLM proponents, who made that transition to actual consumer use long ago, Avon Products (AVP) and Tupperware (TUP), may well both be a better bet that HLF right now. If you have done an Ackman and shorted HLF, using the cash to invest in both of these stalwarts of network marketing would have the added bonus of delicious irony. It may well say something bad about my character, but using the proceeds of shorting HLF to buy AVP and TUP would appeal to the perverse side of me.
As fun as that is for me, it is not a great reason to buy stock. What is, however, is that both AVP and TUP have the controversy about their business model well behind them, both have proven, genuine retail sales and both are trading at somewhat depressed prices. There are, of course, sound reasons why the stock of each is down, but both may have fallen too far.
Avon Products (AVP):
AVP has spent most of the last year collapsing as the extent of problems in the North American market became clear. The company is actually losing money here in the US, but the focus on that has obscured the fact that, globally, Avon is still a profitable company. Q3 2013 results were disappointing and management have had a relatively pessimistic outlook for a while, but the bad news looks thoroughly priced in, with a forward EPS around 12.5 and an Enterprise Value (EV) of about 0.9x revenue.
The company showed that they are prepared to dispose of ailing divisions when they sold their Japanese business to private equity firm TPG in 2010. That isn’t the plan for North America right now; AVP have stated that they are making a return to profitability in that market their top priority and will no doubt at least give it the old college try. It just seems that failure in that endeavor is already priced in, and with sale of the division as a backstop there would seem to be very limited downside from here.
Regular readers (both of them) will know that I am a fan of stop-loss orders, and this is a case where one would definitely make sense. We are very close to the low of $14.23 which is partly what makes this an attractive medium term trade, and a clean break of that level would be a realistic stop. Somewhere around $13.50, about 10% away, would make sense.
The chart for TUP tells a very different story to AVP. Tupperware had a fairly decent year in 2013, right up until they started to issue pessimistic guidance for this year, then lost around 28% in January. This move was probably overdone and some retracement has taken place, but the low of around $75, combined with the June low of $73.07, once again gives us a trade with a logical stop-loss (somewhere around $72.50) that limits potential losses to below 15%.
As to the upside, a dividend approaching 3.5% helps, but even after analysts have downgraded expectations for this year TUP still trades at a discount to the market, with a forward EPS below 14 and an EV of 1.8x revenue. They have decent free cash flow and a solid record of margin growth that will, to some extent, offset any revenue decline should management’s gloomy outlook be correct.
TUP, like AVP, looks like value in the short to medium term, but it is in the long term where they differ most from HLF. Both are now established retailers who just happen to use network marketing for sales and distribution. HLF is a network marketing company that, it seems, just happens to sell some products to consumers. Until that changes I will continue to steer well clear of HLF, but that doesn’t mean I won’t look out for other opportunities in MLM.