Herbalife Tops Estimates: Investing in the Company Still too Risky

Marivic 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), one of the most controversial and watched companies reported its financial performance for the fourth quarter of fiscal 2012 after the closing of trading at the Wall Street on Tuesday.

Based on its financial statement, Herbalife’s revenue for the fourth quarter was $1.1 billion, a 20 percent increase compared with its $884.5 million total sales during the same period a year earlier. Its net income rose from $105.4 million or $0.86 per diluted share to $117.8 million or $1.05 per diluted share. The company's financial result beat the consensus estimate of analysts of $1.03 EPS and $1.04 billion revenue.

For the full year 2012, Herbalife reported its revenue climbed from $3.45 billion to $4.07 billion and net income increased from $412.5 million to $477.19 million. Its diluted EPS was $4.05. The company raised its EPS guidance for the fiscal year 2013 to approximately $4.45 to $4.65.

Since December 31, 2012, Herbalife repurchased 4 million shares at an average price of $40.61 per share, or a total amount of $527.8 million. The company said it has $787.6 million remaining under its $1 billion share authorization. In addition, the board of directors of the company approved the distribution of $0.30 per share quarterly dividend. During the period, the company paid $135.1 million in dividends, and invested $122.8 million in capital expenditures.

According to the company, by the end of 2012, the average active sales leaders of the company worldwide were 277.8 million. Take note that China has least number of active sales leaders at 11.6 million, while North America has the largest number at 63.2 million. China allows direct selling, but prohibits multilevel marketing (MLM) wherein a sales distributor would earn commissions and royalties from recruiting. The Chinese government prohibits the MLM sales method to prevent the return of pyramid schemes.

Source: Herbalife  Quarterly Breakout Key Metrics 

The stock price of HLF surged by 2.58 percent to nearly $40 per share by the end of the trading hours on Tuesday, the stock is still 6.5% below its stock price prior to the allegations of Bill Ackman that the company’s business model is a pyramid scheme.

Despite the positive 4Q earnings performance of the company, I believe that investing in stock of Herbalife is too risky due to possible regulator pressures. Last January, it has been reported that the SEC launched an investigation against the company. Earlier this month, the media speculated that Herbalife was subject of law-enforcement probe by the Federal Trade Commission (FTA). The spokesperson of the agency declined to confirm if the company is actually under investigation. He explained that the FTC withheld some information in the documents posted online because some of the foreign consumers who complained against Herbalife requested confidentiality. The FTC released over 700 pages of complaints against Herbalife after the New York Post filed a Freedom of Information Law request.

In addition to regulatory pressures, Herbalife’s stock fluctuates whenever Ackman or Icahn says something about the company. The investment community already knew that Ackman shorted 20 million shares of Herbalife while Ackman owned 12.94 percent stake or more than 14 million shares of the company. Daniel Loeb acquired 8.24% stake or 8.9 million shares, and emphasized that the pyramid scheme accusation has no merit. It is interesting to note that his latest 13F filing revealed that his position in the company is 3.1 million, which means he sold more than 5 million shares. According to reports, Loeb is reducing his stake in the company, and it is unknown how many shares were left in his portfolio. Robert Chapman sold out his stake in Herbalife citing that the stock is under pressure.

With all the controversies and varying opinions about Herbalife, betting for or against the stock is not worth it, but watching the Herbalife drama series between Ackman and Icahn amused many, others raised their brows, and some shook their heads.

There are many stocks out there that are promising, such as Workday (NYSE: WDAY), a company that provides cloud-based application for payroll, employee management, human capital management, financial management, and procurement and time-tracking services and Realogy Holdings (NYSE: RLGY), the largest real estate services company by revenue in the United States. Both companies went public in October, last year.

Workday surged by more than 70 percent on its debut from its offering price at $28 per share. As of this writing, the stock price of the company is up by 1.84 percent to more than $51 per share.  The company reported that its revenue for the 3Q FY13 increased by 99 percent to $72.6 million from $36.5 million and subscription revenue increased by 116 percent to $51.6 million during the same period a year earlier. Workday said added significant customers during the quarter including DuPont, Johnson Controls, Yale University, and J.B. Hunt.

On the other hand, Realogy reported that its 4Q revenue was $1.2 billion, a 30 percent increase from the same period in previous year while its full year revenue rose by 14 percent to $4.7 billion. The recovery of the housing market is good news for the company as it generates income from home sales and real estate services. Its stock price climbed by 25 percent from its IPO price of $27 per share to more than $45 a share.

Tiger Cubs John Griffin of Blue Ridge Capital and Stephen Mandel of Lone Pine Capital owns a significant amount of shares in Workday and Realogy, based on their 13F filings for the fourth quarter of 2012. Griffin bought more than 1.79 million shares of Workday with over $97 million market value and Mandel’s purchased 980, 404 shares in the company with an estimated market value of $53.4 million.

Griffin and Mandel own more than 5.2 million shares and 2.4 million shares of Realogy with approximately a $220.29 million and $101.90 million market value, respectively.


MarieCabural 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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