Reasons You Should Believe in Herbalife

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

Herbalife (NYSE: HLF) is synonymous to a selling strategy called multi-level marketing (MLM,) or direct selling. Some argue that this MLM is a good way to start an entrepreneurial path with very minimum capital involved. On the other hand, some call MLM a bad idea, and may even be tagged as a form of pyramid scheme. Whatever the case, Herbalife continues to grow despite these challenges and the criticism thrown its way.

In pursuit of a healthy and active life

Herbalife, as stated in its mission, believes that the company exists, “to change people’s lives by providing the best business opportunity in direct selling and the best nutrition and weight-management products in the world.”

Founded in 1980, Herbalife’s products and services are now sold in over 80 countries worldwide. This global nutrition company promises people the ability to live a healthy and active life. Additionally, its products and services can only be purshased thru its core of dedicated 2.7 million independent distributors spread across the globe.

To pursue its mission further, the company also supports world-class athletes and teams in more than 15 sports, including the LA Galaxy and FC Barcelona soccer teams.

With the figures finally reconciled for the whole year, the company hit a revenue of $4.1 billion, reaching its earnings per share target of over $4.05, which is 23% higher compared to 2011. This was a good performance by any standard, allowing analysts to declare that Herbalife is a good investment at this point in time, as well as boosting the confidence of investors with distributors that go a long way to connect with their customers, and venturing deeper into their existing client base.

In danger of its competition

The company’s main rivals include Nu Skin Enterprises (NYSE: NUS) and Avon Products Inc (NYSE: AVP). Nu Skin is a global direct selling company with operations in 51 countries worldwide and a sales force of 800,000 active distributors. In 2012, Nu Skin posted record revenue of $2.17 billion, a 24% year-on-year increase compared to the previous year. The increase can be attributed to the strong performance specifically in Japan, South Korea, and mainland China. This year Nu Skin will launch its age LOC weight management system, which can significantly contribute to its overall revenue for the year.

On the other hand, Avon, founded in 1886, is engaged in the manufacture and marketing of beauty related products around the world, including cosmetics, skin care products, personal care products, fashion products, fragrances, house wares and nutritional products. Its recorded 2012 revenue was $10.7 billion.  Additionally, the company is listed #70 in Forbes' World’s Most Powerful Brands. Avon can definitely pose a serious challenge to Herbalife.

Icahn believes in the value of herbalife

Veteran hedge fund manager Carl Icahn believes that Herbalife is ripe for the picking, what with its steady cash flows and little debt, saying, “I believe it is an undervalued company. There’s a great deal of money to be made here.” Icahn owns 14 million shares of the company, which is roughly a 13% stake.

Icahn is not alone

Despite these challenges and criticisms, Tiger Consumer Management’s Patrick McCormack doubled his exposure with the company from 1.4 million shares to 2.3 million shares by the end of December 2102, making his group among the company’s 20 largest investors. Another believer in the company is Geode Capital, started by mutual fund behemoth Fidelity Investments, which increased its stake in Herbalife. Along with McCormack, Phillipe Laffont, founder of Coatue Management, owns 850,000 shares of Herbalife. As of January 2013, hedge fund heavyweight Daniel Loeb owns an estimated 8.9 million shares of Herbalife, making him the second-largest investor of the company behind Fidelity.

The opposing force to the believers

Recently, Icahn had a public spat with Pershing Square Capital Management’s Bill Ackman, who has a huge billion-dollar short bet against Herbalife’s shares, as opposed to Icahn’s long-term bet. Ackman described Herbalife, and the MLM method it utilizes, as a bad idea and a sort of a pyramid scheme. Ackman even argues that the company is like a house of cards where its stock could eventually drop to zero.

The future of herbalife seems bright

Icahn said that, “without question, Herbalife sells a good product.” Add this to the fact that the company is showing growth year-on-year, and its stock is relatively cheap.  Clearly, Herbalife is a good bet.

JosefRayDagatan 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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