Herbalife Shares — 3 Pros, 3 Cons

A blowout quarter shows prospects look bright

   
Herbalife Shares — 3 Pros, 3 Cons

With just about every stock taking a hit on Tuesday, shares of Herbalife (NYSE:HLF) posted an impressive 5.7% gain to $58.70. Then again, the company, which uses network marketing for things like nutritional supplements and weight loss products, had a blowout quarter. Sales increased by 28% to $879.7 million and operating profit came to 88 cents a share, up 35%.

Herbalife has a good track record in rewarding its shareholders. For the past three years, the average annual return was a sizzling 41%.

But what can we expect going forward? Will the company keep up its winning ways? Here’s a look at the pros and cons:

Pros

Powerful business model. Herbalife pays hefty commissions to its distributors, and it tries to get customers to also become distributors – which results in even more commissions.

It’s a viral model that has resulted in tremendous growth. So far, there are more than 2.3 million distributors across 75 countries. More importantly, it is a fairly low-cost model.

Broad offerings. Herbalife invests aggressively in developing high-quality products. The company has an internal team of scientists, which seek new innovations, and it has donated to UCLA, which has been a great source of expertise.

Support. To make its model work, it is essential to provide training and assistance to distributors. Thus, Herbalife has an extensive assortment of videos, books as well as a web-based tool, called iChange, which leverages social media like Twitter and Facebook.

Cons

Tough environment. Herbalife must deal with strong competitors as well as a deteriorating economic environment (as seen with the latest economic reports). Some of the traditional rivals include NuSkin Enterprises (NYSE:NUS), Nature’s Sunshine (Nasdaq:NATR), Weight Watchers (NYSE:WTW) and General Nutrition Centers (NYSE:GNC). There are also threats from e-commerce players, such as Amazon.com (Nasdaq:AMZN).

Regulations. Herbalife must deal with many government requirements on manufacturing, labeling, distribution and importation. What’s more, there are occasionally big threats from proposed restrictions on marketing.

Liability. As Herbalife’s products get more complicated, the risks increase of adverse effects. In other words, there could potentially be product liability claims.

Verdict

Herbalife boosted its guidance for its full-year results. Earnings are now expected to reach $2.97-$3.07 a share, up from the prior guidance of $2.77-$2.89. Sales are forecasted to increase 22%-24%. In other words, it looks like the company’s strong momentum will continue.

At the same time, the longer-term prospects also look bright. Keep in mind that there is lots of room for upside in international markets.

In light of all these factors, the pros outweigh the cons on the stock for now.

Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.

 


Article printed from InvestorPlace Media, http://investorplace.com/2011/08/herbalife-hlf-3-pros-3-cons/.

©2014 InvestorPlace Media, LLC

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