Despite Bearish Sentiments, Buy Herbalife, Sirius
David 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)… what investment review could not mention how part of the market is adamant that this direct MLM seller is orchestrating a Ponzi Scheme. Ever since legendary short seller David Einhorn inquired in a press conference what amount of sales come from within the distribution network versus directly to consumers and received no response, shares have fallen dramatically from a high of around $72 to a low of $42 or so.
All the while, I was adamant that the bears would come to their senses and start defending their shorts.The stock is now up 19% from its 52-week low and eddying closer to its 52-week high, which is currently 30.9% under thus far. At a respective 13.4x and 11x past and forward earnings despite tremendous - and I mean tremendous - free cash flow growth, Herbalife is substantially undervalued. Recognizing this value, analysts rate the stock a 1.2 out of 5 where "1" is a "buy."
FCF for the TTM ending 2Q12 has grown to $430.6 million from $380.8 million one year ago. The average annual FCF over the last five months is $281.1 million and thus rapidly rising. Even still, the firm is valued at 12.9x 2Q12 FCF (ttm) - incredibly low given the growth. In fact, over the last five years, Herbalife has grown EPS by 28% annually. It is only expected to grow by 14.8% annually over the next five years, which I believe sets the bar very low for outperformance.
ROA, ROE, and ROI are all in the very high double-digits to low triple-digits. Debt may be high with the debt-to-equity ratio at 2.1x, but this will help finance continued growth. I believe expectations are low since growth forecasts during a recovery should not be less than growth during a recession, especially for a consumer business. At a PEG ratio of just 0.91, Herbalife easily is worth a "buy."
Like Herbalife, there is a lot of bearish sentiment surrounding Sirius XM (NASDAQ: SIRI). In my view, however, the stock is also substantially undervalued. Over the trailing twelve months, the firm generated $0.53 per share. The company only trades at 4.8x this amount. EPS over the next five years is expected to grow by 25.2% annually, which means attractive upside should investors get in now. ROA, ROE, and ROI are all in the very high double to triple digits while the target price is at almost a 20% premium to the current market assessment.
Although Sirius has more downside than Herbalife has as a result of its elevated free cash flow multiples and headwinds with Liberty Media, it still is more positioned towards reward than risk. This favorable asymmetric risk arises from positive secular trends in its virtually monopolistic control of radio media and low PEG ratio of 0.19. I recommend buying a speculative stake to benefit from the growth curve ahead.
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