The Return of Herbalife

Shazir 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) has picked up a bunch of traction in the news lately with tons of people shorting it and tons of people buying into it. Recently, this stock picked up a ton of volume after billionaire investor Bill Ackman said this stock was a pyramid scheme, and was the worst investment idea he has ever seen, in terms of keeping it as long term stock. After he said this the stock plummeted miserably; however, should we really sell this stock. Certainly the company is focused on long term goals. Likewise, investors should not forget about their long term goals. Given the present situation, investors have a higher chance of making money in this stock in the future.

With all of this said, and with Herbalife being as volatile as it is, is it seriously a short? With hedge fund titans getting involved is it really a good idea for the small investor to dive in? The matter now is not what Ackman thinks but what we as investors think. The reality is that Herbalife has more than $3 billion in revenue, and in fact, according to the market capitalization is valued at about $4 billion. So is this investment truly a good (safe) one? Herbalife does have the fair share of its market, which it needs in order to stay on top of its niche. It has products, distributors, and revenue.

The problem with this company is not the company itself, but are the people surrounding it, the celebrity endorsers for example. Ever since Bill Ackman made his announcement public, the shares have gone down more than 15%. The likeliness of the situation is that his firm has probably made hundreds of millions of dollars and millions of people have lost millions of dollars. Before Ackman was involved Herbalife was doing about 4.5 million in volume. It is now doing triple that amount. Herbalife does billions in revenue, and it appears to be a stable company. The price target within a year is set at $75.43. With this price target, an individual would be able to double his/her money. With all of this being said, should you keep this, here are some reasons to answer some of your questions.

Catalysts

This company was doing just fine without all the publicity; in fact, everything was going just perfectly. Herbalife gives a dividend of 3.7%, this is vital these days. It also has very little debt, $886 million, as compared to assets of about $1.5 billion. These key statistics make Herbalife a very good buy. Even at about $35/share this company has a P/E of about 10. This shows how attractive HLF's share price is in relation to its earnings. Herbalife had 3rd quarter 2012 revenue of $1.0 billion. Analysts were expecting $996.9 million. This was 13.6% above the prior year's 3rd quarter results. Herbalife's net income is also about $2.8 billion.

This company is not going to go away. Even if the U.S. government seizes (worst case) its business here in the U.S., it still does 80% of its business outside of the U.S. Plus you have to remind yourself, this stock was well above $70 dollars per share. It was at $70/share before Green Light capital commented and set off investigations. HLF's forward P/E is also at 8.33, which makes it a very good price. HLF's quarterly earnings growth is about 10% which is also very good. The company also has a return on equity of more than 100%, which means that for every dollar they put in they make one dollar.  Another added point to consider is the possibility for phenomenal earnings which would make all stock-shorters look like fools. If Herbalife does come out with outstanding earnings then this would allow HLF to slowly return to highs.

Competitors

Avon Products (NYSE: AVP), has had claims made against it, that it is a scam in some way. Avon products is currently 10% away from its 52-week highs. Avon has revenue of about $11 billion, and although this company is rated a buy, I would still recommend HLF. This is mainly due to the fact that it rejected a buyout offer of $24.75, which was almost 20% above Avon's stock price at the time. Avon, has also had a ton of legal allegation charges, such as violations of the Foreign Corrupt Practices Act. Avon spent nearly $250 billion trying to fight off  these allegations. This really killed their cash flow. I believe that Avon is a good company, they just have a history of a bad past. These allegations could show up again a few years from now.

Nu Skin Enterprises (NYSE: NUS), is also considered to be a good company, due to its distributors, and its amazing client portfolio. Nu Skin has revenue of about $2 billion. This makes it pretty small as compared to the other two mentioned in this article. Nu Skin is more of a long term company. This company would be a company that would probably net a return 5 to 10 years from now. Another factor to consider is their net operating income at about $250 million; while Herbalife stands at $600 million. For these reasons I would recommend Herbalife. Because Herbalife has already been beaten down pretty badly, and it is now their time to slowly start to go back up.

Conclusion

This company has been very risky lately; however, the future should be good. This company has what it takes to return to former levels, with tons of new products, tons of distributors, and tons of income. This stock just has a bunch of current "issues" not problems. As time goes by, the dust will settle in and slowly this stock will return to where it was before, at $70 dollars a share.


Shazir Mucklai 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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