Herbalife Keeps Regaining Value after Receiving Buy Recommendations

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

Herbalife’s (NYSE: HLF) stock price is up by more than 12 percent to around $32.95 on Monday, Dec. 31. The shares of the company continue to regain value. Over the past three consecutive trading days, Herbalife's stock was up by 8.6 percent and closed at $29.39 last Friday.

The stock value of the company dropped by 38 percent two weeks ago after activist investor Bill Ackman of Pershing Square Capital Management confirmed that he shorted 20 million shares of Herbalife, and attacked the company as a pyramid scheme

Investors have mixed reactions over Ackman’s analysis regarding the company. Whitney Tilson of T2 Partners described Ackman’s analysis on Herbalife as the “most remarkable investment analysis,” and he admitted that he is also shorted the shares of the company. Other investors started buying the stock. They believe the stock is cheap at its current price.

Sahm Adrangi of Kerrisdale Capital Management and John Hempton of Bronte Capital said they took a long position on Herbalife shares. Kerrisdale Capital tweeted on Dec. 26, “We´ve gone long $HLF at this $26 level. The internationally diversified nature of HLF makes it impermeable to short attacks, we think.”

On his part, Hempton stated that he was convinced by everything in Ackman’s presentation except by his conclusion the stock will collapse. He suspected that Herbalife is so profitable and so powerful, and it has the capability to mitigate Ackman’s criticisms. He said, “The easiest way to do that is to buy back stock (and make the stock go up). Mr. Ackman has given them the incentive to return their huge (but tainted) profits to shareholders (and I plan to be a recipient shareholder).”

On the other hand, ValuEngine, a research firm, recommended a “strong buyfor Herbalife. Based on its research note, the nutrition and weight management products manufacturer will top the average market performance next year, citing that it has an “attractive market valuation, P/E ratio, and company size. According to ValuEngine the stock is undervalued by 59.79 percent and should be trading around $68.17 per share.

In a research note, ValuEngine suggested, the best time to buy Herbalife stock is when the price is below $30.67 (or valuation below 55%), and the best time to sell is above $108.38 (or valuation above 59%). The research firm also projected the company will deliver higher returns in the future compared with its competitors in the industry such as GNC Holdings (NYSE: GNC) Herbalife is expected to deliver 14.61 percent over the next 12 months and 17.51 percent returns in two years. GNC is expected to generate 9 percent and 11.22 percent returns over the next 12 months and within two years, respectively.

<img src="/media/images/user_15059/herbalife-forecast-comparisons_large.JPG" />

According to ValuEngine, its assessment was based on multiplying Herbalife’s previous PEG with recent four quarter EPS and the forecasted EPS growth rate for the company over the next four quarters. The company’s average PEG over the past seven years was 1.12, and it earned $3.98 per share in its recent four quarters.

Based on the research firm’s risk assessment, Herbalife has a 59.75 % chance of gains and 40.25% chance of losses compared with GNC’s 60.85% chance of gains and 39.15 percent chance of losses over the next twelve months.

ValuEngine’s analysis is quantitative, based on its ten predictive variables, and its assessment does not include other factors/issues such as Ackman’s criticism that the company is a pyramid scheme.

Timothy Ramey, analyst at the research firm D.A. Davidson & Co., recommended buying Herbalife shares. He believed the company’s stock price is relatively cheap.

Based on its closing price last Friday at $29.39 per share, will Herbalife pass Benjamin Graham’s criteria in value investing? Under Graham’s value investing strategy, investors must invest in companies with more than $340 million in annual sales. A company must have an EPS growth of at least 30% over the past ten years and must not have a negative EPS over the previous five years. In terms of P/E ratio, it should not be higher than 15. The company’s total sales of $3.9 billion last year, long-term EPS growth of 482.4%, and P/E ratio of 7.06 (using its current PE) pass these criteria.

Herbalife’s current ratio at 1.39, long-term debt ($450.1 million) in relation to its current assets ($261.2 million), and its price/book ratio at 7.96 with no P/E (0) value failed. Graham value investing approach requires the current ratio must be equal or greater than 2, the long-term debt should not be higher than its current assets, and the price/book ratio must be reasonable. Overall, the Herbalife’s score is only 57%, which is not high enough to be considered a good pick for value investors.

The latest issue facing the company raises the question of if Herbalife’s business model can sustain future growth. Investors are waiting for the company's upcoming analyst and investor day on Jan. 10. It's going to be important to hear a detailed answer to the questions raised by David Einhorn regarding its accounting practices, a thorough explanation about its business model, and its future growth prospects.

Meanwhile, it is interesting to check the performance of another nutrition and supplement products retailer, Vitamin Shoppe  (NYSE: VSI).  Over the past 52-weeks the stock demonstrated an upward trend from $39.81 to $61.89 per share. Vitamin Shoppe’s stock surged from the $17 offering price since its IPO in 2009. During its previous quarterly earnings report, VSI posted $0.54 earnings per share, higher than the $0.46 consensus expectations of analysts. Over the past three years, VSI delivered 154.5 % returns, compared with GNC’s 5.28%. The company has $1.69 billion market capitalization with a P/E ratio of 27.76.

<img src="/media/images/user_15059/vsi-total-returns-comparison_large.JPG" />

Last month, Vitamin Shoppe agreed to acquire Super Supplements, a vitamin, mineral, and supplement retailer, for $50 million using its available cash. The FTC is currently reviewing the company acquisition agreement with Supplements. Both companies are cooperating with the FTC inquiry and agreed to extend the completion of the deal until March 1, 2013.

The stock price of HLF is again up by 1.79% $37 per share, GNC increased by 5.25% to $33.89 per share, while the shares of VSI dropped by 0.21% to $56.40 per share during after hours trading on Jan. 3.


MarieCabural has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

blog comments powered by Disqus