Has This Nutritional Focused Company Gone Sick?

By Ryan Guenette - August 29, 2012 | Tickers: HAIN, HLF, NTRI, WTW, WFM | 0 Comments

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Year to date the S&P 500 has rallied 12.03%. Over the same time period, Herbalife Limited (NYSE: HLF) has fallen 1.32%, after being up nearly 40.00% in May. After crushing second quarter estimates and raising guidance, David Einhorn jumped on the conference call and asked some questions. Known notoriously for his short selling, Einhorn asked two questions revolving around the logic of the company’s business model, then continued on to ask about the metrics the company has stopped disclosing. Although it is not known what position Einhorn had in the stock, the slight attack on the company caused it to fall 25% the next day. After Einhorn spoke out against the company, Herb Greenberg and Jim Cramer both turned to bears with him, leading to a further drop in the stock. Despite the huge drop in the stock, the fundamentals of the company have remained strong, so has this nutritional focused company gone sick?

Fundamentals Are Still Pointing Northward

In 2009, Herbalife reported earnings per share of $1.61. In 2014, the average analyst consensus believes the company will derive $5.14 from its business operations. This represents an increase of 219.25% over only a 5 year time period. Based on these statistics, the company’s compound annual growth rate (CAGR) is 26.13%, a tremendous feat for any company. This growth rate is in the sweet spot, sustainable but fast-paced. Herbalife’s growth is consistent, rising each and every year during this period. The company’s double digit growth rate should push the stock to higher levels. Additionally, at the moment Herbalife pays out an annual dividend of $1.20, which at the current price puts the company’s stock as yielding 2.37%. This dividend is up from 2011’s annual dividend of $0.80, and is further expected to grow into the future. By 2014, the street anticipates the dividend reaching $1.73, which at the current price would put the company’s dividend as yielding 3.39%. From this we can see Herbalife’s underlying financial resolve, annualized double digit growth rate, and decent dividend.

The chart below displays Herbalife’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the foreseeable future.

Monumental Shift & Bargain Price

Let’s face the cold hard facts, the world’s waistline is growing, and growing fast. The percentage of the world’s population that is overweight or obese has grown, and according to forecasts released by the Organization for Economic Cooperation and Development, will continue to grow. Just take a look at the chart below.

The more people that are overweight, or that are battling obesity, the more potential customers Herbalife will have. Herbalife sells weight management, nutritional supplements, energy, sports, and fitness products and personal care products through its 2.7 million independent distributors, catering to the population that is obese or overweight. In conclusion, Herbalife’s market is expanding, and is only projected to continue to expand into the future.

Herbalife dropped 25% in one day because of what one man said. The company’s prospects and fundamentals did not change. Although David Einhorn has been very successful in the past shorting companies, this company is not a broken company, but is a thriving one. Additionally, David Einhorn has not made any public comments on Herbalife, meaning he may or may not be shorting the company. The huge drop in the stock has created an amazing opportunity. As the chart below displays, Herbalife’s earnings have just continued to increase, while it has become the cheapest in years.

All in all, Herbalife is in a fast growing industry, and is the cheapest it has been in years.    

Is There A Sick Company In the Hospital?

Compared to some of Herbalife’s most prominent competitors, such as: Whole Foods Market (NASDAQ: WFM), The Hain Celestial Group  (NASDAQ: HAIN), Weight Watchers International (NYSE: WTW), and NurtiSystems Incorporated (NASDAQ: NTRI), Herbalife compares relatively in-line.

In terms of growth, Whole Foods Market leads the industry, while NutriSystem is the laggard of the sector. All companies except Hain Celestial pay out dividends with NutriSystem possessing the largest dividend, and Herbalife possessing the fastest growing dividend. In the fundamental ratio comparison, Weight Watchers appears to be trading at a bargain, while NutriSystem is trading at a large premium. When growth is taken into account, Herbalife appears to be a bargain, while NutriSystem trades at a hefty premium. In the net profit margin comparison, NutriSystem stands out to the downside, while Weight Watchers stands out to the upside.

The Foolish Bottom Line

Herbalife has underperformed the broader market extensively year to date all because of rumors and whispers about David Einhorn. This notorious short seller asked a couple of questions on the conference call and suddenly the stock dives 25%. The company’s fundamentals are the exact same as they were before David Einhorn spoke up, and it is not absolutely known that Einhorn is shorting the stock. Herbalife has incredible financial strength, an annualized double digit growth rate, and moderate dividend. In addition, the long-term shift to healthy eating and weight management will play right into Herbalife’s court. Finally, the stock is the cheapest it has been in years in terms of the price to earnings ratio. The foolish bottom line is that Herbalife may have caught a recent cold, but the stock is healthy over the long-term.   

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