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Herbalife Bites Back On Controversy Amid High Growth

By: Investor's Business Daily
Posted: 8/28/2013 4:38:00 PM
Referenced Stocks: HLF;LRLCY;NUS;PG;USNA

With a rising stock price and a lengthy run of double-digit sales and earnings growth, these should be happy days for executives atHerbalife ( HLF ).

Emerging markets await with huge potential, Herbalife's president tells IBD, yet the multilevel marketing firm that sells vitamins and herbal supplements keeps having to defend itself from attacks on its business model and stock price.

Herbalife sells weight management, nutrition and energy/fitness products through a global network of distributors that spans nearly 90 countries on six continents.

The company has run off 15 straight quarters of double-digit sales and earnings growth. Its stock price has nearly doubled since the beginning of the year.

Despite those accomplishments, Herbalife has spent much of 2013 battling very public attacks from hedge fund manager Bill Ackman, who has shorted the stock and called Herbalife an unsustainable "pyramid scheme."

Battles Among Billionaires

Ackman's firm, Pershing Square Capital Management, has a $1 billion short position on Herbalife. That bet has reportedly lost him more than $300 million so far.

In addition to Ackman's attacks, Herbalife had to deal with another blow recently when one of its top distributors, John Peterson, died in an apparent suicide.

Peterson's death was reported in the New York Post on the evening of Friday, Aug. 16, contributing to a 4% decline in the price of Herbalife stock Monday, Aug. 19. Though Peterson's death had no apparent connection to Ackman's criticisms of Herbalife, that didn't stop Ackman from tying the two together in a letter to investors.

"The stock declined 4.1% on the news potentially because of the impact on other distributors' confidence from his death and what it may suggest about top distributor business prospects going forward," Ackman wrote.

Herbalife executives have largely stayed on the sidelines during this fracas, but Herbalife President Des Walsh spoke with IBD about it.

"Bill Ackman made a reckless and unfounded bet that he could damage our value perception in the marketplace," Walsh said in an interview with IBD Monday. "Every element of that attack has been thoroughly discredited, as evidenced by the performance of our company and stock price."

Many analysts sound a similar refrain, implying that Ackman's attacks on the firm, including the suggestion that Herbalife's stock price eventually will fall to zero, have taken on a whiff of desperation.

In an Aug. 19 research note, analyst Tim Ramey of D.A. Davidson & Co. said the "central question Pershing Square raised in support of its $0 price target for Herbalife was the premise that Herbalife is an illegal pyramid scheme."

That claim has been "clearly vetted by our work, and by numerous other market participants, as completely false," said Ramey, who also follows fellow multilevel marketers (MLMs)Nu Skin Enterprises ( NUS ) andUsana Health Sciences ( USNA ).

"We can argue about a lot of things with regard to MLMs, but the likelihood of any of the three that we follow being judged an illegal pyramid scheme is close to zero," Ramey noted. "Ackman's commentary of late seems to acknowledge this. He is stirring little fights on little issues rather than the big go-to-zero story."

Stakeholders Of Note

Another staunch Herbalife defender is billionaire investor Carl Icahn. He has increased his stake in the company to 16% this year and publicly defended Herbalife's management team and business model.

In late July, it was reported that fellow billionaire investor George Soros also opened a large long position in Herbalife.

Meanwhile, Wall Street seems more interested in Herbalife's financial performance. The company's stock price has risen 97% this year and currently trades near 65.

That increase is due in large part to Herbalife's ability to keep putting up strong growth numbers.

"The key driver of our growth today is that more consumers are users of Herbalife products every single day," Walsh said. "More than 90% of our growth comes from well-established markets we've been in for five or 10 years or more. Examples include the U.S., U.K. and Brazil."

Each of those markets showed double-digit volume growth during Herbalife's second quarter. The 11% volume growth in North America was particularly encouraging, notes Wedbush analyst Rommel Dionisio, because it alleviated concerns about the "below-trend growth" of only 4% in the first quarter.

He also gave an upbeat review of the company's performance in overseas markets.

"Driven by continued expansion of daily consumption clubs around the world, Herbalife delivered broad-based growth in Q2, with volumes rising 33% in South America, 8% in Mexico, 49% in China and 16% in Europe/Middle East/Africa," Dionisio noted in a second-quarter earnings research report.

Herbalife posted Q2 sales of $1.2 billion, up 18% from a year ago and above consensus estimates for $1.16 billion. Earnings gained 29% to $1.41 a share, atop views for $1.18.

Analyst polled by Thomson Reuters expect full-year profit to rise 23% to $4.99 a share.

Western Waistlines Abroad

Large emerging markets such as China and India have "huge potential" for future growth, Herbalife's Walsh says. He cites those countries' large populations as well as their rising levels of disposable income -- and their adoption of Western-style diets and lifestyles.

One result of the latter trend is that many people are developing Western-style waistlines, which Walsh says drives growth in Herbalife weight-management products.

"Sadly, growing obesity rates lead to a need for Herbalife-type healthy eating and active lifestyle products," he said. "In these as in all markets, our weight management products represent the core business."

Herbalife is the eighth-largest company by market cap in IBD's Cosmetics/Personal Care industry group. Ranked No. 32 of 197 industries tracked, it's home to giants such asProcter & Gamble ( PG ) andLoreal Co. ( LRLCY ), as well as firms such asAvon (AVP) that do person-to-person sales.Weight Watchers International (WTW),Nutrisystem (NTRI) andMedifast (MED) compete with Herbalife's weight-loss lines.