Bull of the Day: Herbalife (HLF) - Bull of the Day
08 Januar 2014 - 8:42AM
Zacks
Herbalife (HLF) has a few potential catalysts and strong
support from the analyst community. It has a Zacks Rank of #2 (Buy)
and is the Bull of the Day today.
Herbalife Beats Estimates in 29 Straight Quarters
Herbalife has topped the Zacks Consensus Estimate in each of the
last 29 quarters which is a pretty unique accomplishment.
The last two beats were $0.22 and $0.27 -- but put in better
perspective when you look at the percentage surprise. The June 2013
quarter came in 18.5% ahead of expectations and the September 2013
quarter was 23.7% ahead of analysts’ estimates. Those are some
pretty big beats.
Company Description
Herbalife is a network marketing company that sells weight
management, nutritional supplements, energy, sports and fitness,
and personal care products worldwide. Herbalife offers its products
through retail stores, sales representatives, sales officers, and
independent service providers. The company was founded in 1980 and
is based in Grand Cayman, the Cayman Islands.
Herbalife the target of short seller Bill Ackman
In a late-December 2011 conference, Bill Ackman disclosed that
he was short approximately 20 million shares of Herbalife. The
total short interest as of the end of December was approximately 37
million shares. Ackman asserts that the company is nothing short of
a pyramid scheme and will end up at $0.00. To further substantiate
this claim, Ackman needs the FTC to investigate the company and
despite recent rumors and Freedom of Information Acts, there has
been no such investigation.
In early January, Dan Loeb's hedge fund Third Point filed a 13G
which stated it acquired 8.9 million shares and the stock
officially became a battleground stock. It wasn't long after that
point that Carl Icahn became involved as well and the billionaires
went at it on live television.
More recently, the CEO of POST also threw his hat in the ring
and bought a 5% position in the company. He later added to his
position and switch his investment from a passive stake to a more
activist role. As an operator in the space and having done his own
due diligence including becoming a HLF distributor, the bets are
piling up against Bill Ackman.
Herbalife Sees Estimates Moving Higher
Estimates for Herbalife have been rising of late. The Zacks
Consensus Estimate for 2013 for HLF stood at $4.66 as of February
2013. By June of 2013, the consensus had risen to $4.81. The
consensus has since moved higher to $4.99 in September and is now
at $5.25.
Over the same time period estimates for 2014 have moved from
$5.40 to $5.52 and are now at $5.77.
Buy Back
The company recently received a clean re-audit after an insider
trading scandal forced the previous auditor to resign. With this
clean audit, it is likely that the company will call on the debt
market to raise capital with the intention of buying back shares
and or increasing the dividend. Both or either move would result in
a short squeeze, as there are still 21M shares sold short.
Pershing Square recently covered a portion of its short position
and switched to puts, a strategy that limits risk but now includes
a deadline before the buts expire worthless. It is not clear who
has the other side of the put trade.
Previous Bull Of the Day
On October 2, 2013 Herbalife was written up as the bull of the
day. This came just prior to Pershing Square covering 8 million
shares and switching into puts. The stock closed at $73.09 that day
and the day before publication of this article, the stock touched
$80.70. That is a move of more than 10%.
Valuation
Herbalife trades at some very attractive multiples. The trailing
twelve months PE of 15x is well below the 21x industry average.
Similarly, the 13x forward PE multiple is also trading at a
discount to the 16x industry average. Price to sales multiple of
1.7x has the company trading at a premium to the industry average
of 0.5x. One metric I like to focus on is the net margin and HLF
sports a 11.3% net vs a 3.8% industry average. Given the low
multiples and substantially higher net margin than the industry, it
is apparent that the valuation is still depressed based on the
resistance from short sellers as investors are still cautious on
the idea of the stock being a pyramid scheme.
The Chart
A quick look at the price and consensus chart shows that despite
claims of a pyramid scheme and numerous bear attacks on its
multi-level marketing model, the company continues to get higher
and higher earnings estimates. The gaps between the colored lines
show the continued growth in earnings, just what growth investors
want to see.
Full Disclosure
I am long HLF in my trading and IRA account. In fact, it’s the
only stock I own.
Brian Bolan is a Stock Strategist for Zacks.com. He is the
Editor in charge of the Zacks Home Run Investor service, a Buy and
Hold service where he recommends the stocks in the portfolio.
Brian is also the editor of Breakout Growth Trader a trading
service that focuses on small cap stocks and also carries a risk
limiting strategy. Subscribers get daily emails along with buy, and
sell alerts.
Follow Brian Bolan on twitter at @BBolan1
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