Herbalife (HLF) hasn’t been a stranger to the headlines since being bashed by hedge fund tycoon Bill Ackman, who called the company a Ponzi scheme, and then being supported by Ackman’s nemesis Carl Icahn, who called HLF stock undervalued.
This week, though, Barron’s declared that HLF — a multi-level marketer of nutritional supplements — has gotten “boring.” As Ben Levisohn wrote, the days of “hedge fund titans like Carl Icahn and Pershing Square’s Bill Ackman causing the stock to swing like mad appear to be over.”
While it may seem like Levisohn is lamenting the new Herbalife, the shift is hardly a bad thing for HLF stock investors.
Strong Herbalife Earnings
Herbalife was shrouded in controversy even before the Ackman ordeal, as HLF founder Mark Hughes died in 2000 from an accidental overdose after mixing antidepressants and alcohol.
Beyond that, Ackman wasn’t the first person to criticize the Herbalife business model and certainly won’t be the last. The cloud of criticism hanging over HLF hasn’t completely faded away.
That’s why HLF stock should welcome the chance to be “boring.” That way, investors will be able to focus on fundamentals like the recent Herbalife earnings report … which wasn’t dull at all.
Just take a look at these highlights from the Herbalife earnings report:
- Net income for HLF surged 27% in the last quarter to $142 million.
- Herbalife earnings per share were $1.41 excluding one-time items.
- That blew away the Wall Street consensus of $1.14 per HLF share.
- Herbalife revenue jumped 19% to $1.21 billion.
Tailwinds for HLF
Of course, such strong numbers aren’t just a blip for HLF. Herbalife also gave pretty bullish guidance, with sales expected to grow between 13.5% to 15.5% in the current quarter, and Herbalife earnings per share expected to tally between $1.11 to $1.15. That’s up from $1.05 a year earlier, and the upper-end is right in-line with analyst estimates.
And for the full-year of 2014, HLF sees revenue growth of 9% to 11%.
“Our initial 2014 guidance demonstrates our belief that the macro trend of global obesity will increase worldwide consumer demand for our products,” Herbalife CEO Michael Johnson said.
Research supports that macro trend, too. And research firm MarketsandMarkets recently forecast that the global weight loss and diet management products and services market will hit $671.8 billion by 2015, representing a compound annual growth rate of 11.5% from 2010 to 2015.
Sure, there is plenty of competition in the space. Weight Watchers (WTW), for example, is struggling as it faces competition from free smartphone apps. And rival NutriSystem (NTRI) is the midst of a turnaround.
But if Herbalife can even capture even a small slice of this huge addressable market, it should chug along just fine.
A key word in both Johnson’s comments and the aforementioned research is “global,” too. Volume growth in the most recent quarter was particularly good in the emerging markets, for example. Business in China spiked 71% on a volume basis for HLF in the recent quarter, along with 32% in South and Central America. Toss in 19% growth in Europe, the Middle East and Africa, along with healthy 9% growth here in North America, and there’s a lot to like.
Now wonder CEO Johnson isn’t worried about the future.
“The foundation of our business is stronger than it’s ever been and the operating results we announced … are the best in the company’s history,” Johnson added during the Herbalife earnings conference call.
More Upside for HLF Stock
For investors, that could mean more upside for HLF stock.
Sure, shares of Herbalife stock have already more than doubled this year as the company became a pawn in the fiscal chess game being played by billionaires. The shorts, especially Ackman, have been squeezed hard. He has covered about 40% of his position in strategic retreat. Other investors who hoped to profit from a decline in HLF stock have also given up. About 21% of HLF’s float is held by shorts — a decline of nearly 18% from an earlier report, according to The Wall Street Journal.
Despite that run, though, HLF stock still looks cheap. Herbalife earnings are on pace for 15% long-term growth, yet HLF is only trading for 12 times forward earnings. Translation: HLF sports a PEG ratio of 0.85. NTRI stock, for comparison, goes for a PEG of 3.67.
No wonder analysts are optimistic about the stock. Analysts at D.A. Davidson, for example, have a price target of an eye-popping $92 for HLF stock. And the consensus estimate of $78 isn’t too shabby either, representing more than 16% upside for Herbalife stock.
The bottom line: Yes, investors who are looking to follow Icahn into HLF stock are going to have to be patient. The cloud of controversy is not fully gone.
But with the publicity already settling down and HLF stock at least somewhat fading into the background, now could be the time to buy some shares.
Jonathan Berr does not own shares of the listed shares. Follow him at Berr’s World.