Buying Opportunity in Herbalife?
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Herbalife(NYSE: HLF) fell by a whopping 20% on Tuesday, and hedge fund manager David Einhorn seems to be the prime reason for that fall. The famous short seller asked some questions during Herbalife´s conference call, and that was enough to send shares into a deep nosedive.
Is it the beginning of the end for Herbalife or buying opportunity for cool headed investors?
David Einhorn delivered a big blow to shares of Green Mountain Coffee Roasters (NASDAQ: GMCR) in October of last year when he went public with a presentation questioning the company´s financial health and accounting practices. The shares were above $115 on September 2011 and are currently trading near the $50 level. With that precedent, investors in Herbalife may be feeling understandably concerned.
Einhorn has not disclosed any long or short position in Herbalife so far, and he hasn´t made any public statements regarding his opinion on the company or its financial statements. But the questions he asked certainly point to transparency issues, and the example of Green Mountain is still quite fresh on investor´s minds. Herbalife could face a shadow of distrust even if there is nothing wrong with the company.
On the other hand, there is nothing in Einhorn´s questions that sounds too sharp after all. His requests were mostly based on the difference between sales to end customers and distributors. According to the complete transcript published by the Wall Street journal he explicitly asked: So, what is the percentage that actually sold to consumers that are not distributors?
Management seems to have answered Einhorn´s questions reasonably well, and the “distributor versus en client issue” doesn´t seem to be such a big deal for Herbalife. Many regular customers probably sign as distributors to get lower prices for their own purchases, even if they don´t actually act like an active sales force. You can read a more elaborated response to those questions in this 8-K filling from Herbalife.
As long as Herbalife is not cooking its books, sales are still sales, and the profits are still genuine. Maybe the company could try to quantify how many of its distributors make actual sales besides reasonable purchases for their own consumption, more transparency doesn´t hurt at all in these kinds of situations.
There is no evidence of any accounting violations from Herbalife at this stage, and the opportunity could be interesting if the company´s numbers are genuine. Herbalife is a high growth company with strong profitability and many long term opportunities for continued expansion.
If they are lying with the numbers, they are really big liars: Herbalife increased sales at 21% annually in the last quarter backed by a 24% increase in volume. Earnings expanded at a 25% rate according to its last quarterly report. Management seems to be quite optimistic about the future of the company; and Herbalife pays growing dividends and has an active buyback program.
Einhorn´s move is quite peculiar, though. Why would he go into the conference call and ask those questions? He could have asked them directly to the company´s Investors Relations department without raising suspicion.
An experienced professional like Einhorn was probably expecting some repercussions from his questions, and based on what happened to Green Mountain shares, the fall in Herbalife should be no surprise to him. Was Einhorn short Herbalife before going into the call with his questions? That sounds like a possibility.
Judging by the questions posed by Einhorn and the responses he got from the company during the conference and afterwards, there doesn´t seem to be any concrete evidence of wrong doings in Herbalife. If that is the case, investors could be facing an attractive buying opportunity in a company with outstanding growth prospects.
Herbalife management believes that is the case, they published the following sentence as part of the company´s response to Einhorn.
We believe the drop in Herbalife's stock price today is a buying opportunity given the strong business fundamentals and our outlook for ongoing success. We currently have $428 million in repurchase authorization.
The situation is risky, and high volatility should be expected in the following days. But unless we see any concrete evidence about something wrong in the company´s financials, I believe we may be facing an opportunity in Herbalife at current prices.
acardenal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.