Carl Icahn Vs. Bill Ackman: Who Has It Right?

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Carl Icahn and Bill Ackman recently battled in one of the greatest phone interviews of all time. The call was hosted on CNBC and had to do with Herbalife (NYSE: HLF). Bill Ackman initiated a short position in the company and made it known to the public, sending shares tumbling. Carl Icahn did not agree with how Ackman was handling the situation, and things quickly got personal. The two went at it for an extended period of time, and the conflict became known as the "Battle of the Billionaires." The call was posted across every financial website you can think of, making the Herbalife situation one of the most talked about issues on the market. Carl Icahn then came out and announced he had bought over 14 million shares of the company. But who has it right? Rather than taking the two opinions and comparing, let's take a look into the financials and see if the company is fundamentally strong or if it is doomed to head lower. 

Herbalife's Products 

Herbalife has been selling weight management and nutritional supplements since 1980. Their products include protein shakes and snacks, vitamins, dietary supplements, energy drinks, fitness drinks, skin and hair care products. Herbalife says that using their products and exercising will help maintain good health throughout one's life. They also offer fitness tips and nutrition blogs on their website.

How the Products are Sold

Herbalife sells its products using independent distributors. Basically, anyone can sign up to become a distributor as a full time career or as a side job. They also offer additional income if you refer friends, family, or anyone else to become a distributor. They say it is a proven business model with generous compensation plans and impressive training. There are currently over 2.5 million independent distributors in more than 80 countries. 

Earnings 2011-2015

Herbalife has had strong earnings over the last 2 years and is projected to report record numbers over the next two years. The chart below shows this growth.

<img src="/media/images/user_15878/chartgo_9_large.png" />

Herbalife's earnings are expected to grow 15.6% in 2013, 15.8% in 2014, and 13.5% in 2015. This is consistent growth and is a positive for the company and its stock. These are current estimates, so they may even be raised from here.

Current Price

As of Feb. 25 before the open, Herbalife is trading at $36.79. At this price, the stock is trading at just 9.08 times earnings. This is very cheap compared to the industry average of 22.31. Using forward earnings, Herbalife is trading at 7.9 times 2013 earnings, 6.8 times 2014, and 6 times 2015. All of these multiples show that the stock is incredibly cheap.

Additionally, Herbalife currently pays out an annual $1.20 dividend. This represents a yield of 3.26%. This is a huge positive for the stock, because even if it were to trade sideways for a few months it pays you to wait for a run higher.

Pyramid Scheme?

Bill Ackman brought up the accusation of Herbalife being a pyramid scheme. In fact, Ackman's company, Pershing Square Capital Management, created an entire website called Facts About Herbalife. It is dedicated to providing information supporting the claim that the company is a pyramid scheme. The website contains information directly from Herbalife, independent third parties, the media, and former distributor testimonials.

The website also has a full presentation by Bill Ackman and questions he presented to Herbalife. He wants Herbalife to publicly answer his questions, but I do not think he has gone about it in the right way. All of the information is quite compelling and could easily persuade someone into believing that Herbalife is a scheme.


I agree with Carl Icahn on this one. Herbalife is worth an investment at these levels based on the fundamentals. Nothing has been proven against them and I do not think anything will be. I have had friends join programs like the one Herbalife offers just so they can get discount on the products. In fact, Herbalife actually came out and said that 73% of their independent distributors only sign up to receive the discount and 71% of them never recruit other distributors. They also said that 88% of distributors never received payments in 2012. With this said, it does not appear to be a pyramid scheme. I think investors will take notice and pour money back in to this stock. For this reason, I am initiating an outperform call on CAPS. Herbalife is a long term BUY.

JoeySolitro1 has no position in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $50 Calls on Herbalife Ltd.. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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