Caution: HLF is Still a Roll of the Dice

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Congratulations to those investors who stuck with Herbalife Ltd. (NYSE:HLF) through the really tough times, or better yet, jumped into HLF sometime in early March. Herbalife stock has advanced 35% since the end of February, and the rally is still picking up steam.

hlf herbalife stockThere’s a flip side to that coin, however … there’s absolutely no assurance HLF is on the mend on a permanent basis.

The game of cat-and-mouse between the company and Bill Ackman has taken Herbalife stock on a wild roller-coaster ride, but both sides of the table still have some cards left to play.

In other words, the fat lady hasn’t sung yet. HLF still isn’t for the faint of heart.

Bill Ackman Isn’t Down for the Count Yet

Herbalife won the latest round in a fight that’s now been underway for two years, with a U.S. District Court dismissing a class-action lawsuit that claimed the company was a pyramid scheme to artificially inflate the price of HLF shares. Judge Dale Fischer explained in a footnote of the ruling:

“Just as black swans may exist, there may theoretically be some form of opinion that is factual or revelatory in nature such that it qualifies as a corrective disclosure. Such an opinion would need to reveal to the market something previously hidden or actively concealed. That is not this case.”

On the surface it looks like an end to the war, or at least the beginning of the end. But for Bill Ackman, this thing isn’t over yet. A statement from Ackman’s Pershing Square hedge fund noted (even in the wake of news that Pershing Square’s people are now under investigative scrutiny):

“… Herbalife will be shut down or will be required to modify its deceptive practices so substantially that the company will not be able to survive.”

In schoolyard parlance, them’s fightin’ words, telling us Ackman isn’t going to let it go. One has to wonder if he’s holding — or at least thinks he’s holding — at least one more trump card to levy against HLF.

And even if the fight between Bill Ackman and Herbalife is indeed over, it’s not as if the company operation hasn’t been upended by the accusations and inferences.

HLF Stock is Still Dependent on Results

It would have been easy to overlook in the midst of the rather dramatic showdown between HLF and Bill Ackman, but Herbalife is still an operational company, and right or wrong has to deal with the fallout stemming from some rather nasty accusations.

How’s it holding up? Not so well.

Even through 2013 when the publicity/accusation battle was at its height, Herbalife was growing quite nicely. The top line expanded more than 18% that year and earnings per share of Herbalife stock grew from $4.04 to $5.32. By 2014, though, consumers had seen a few too many red flags. Sales growth slumped to less than 3% and per-share profits only expended 8.6%, to $5.78.

The real pain, however, is expected to begin this year. Analysts are expecting revenue to slide 8%, with per-share profits expected to fall 26% to $4.35 per share.

The culprit? Presumably a wave of bad publicity, whether merited or not. That’s the kind of thing that can linger for a long while, steering distributors as well as customers away. It can’t be overlooked, however, that Herbalife did end up changing significant pieces (like compensation) of its business model in the fourth quarter last year — a year after Bill Ackman put the company in the spotlight of public and regulatory scrutiny.

Will the new model work? It’s too soon to say, but the pros clearly don’t expect it to bear as much fruit as the old one did.

Bottom Line for HLF

There’s still no reason to think Herbalife stock is going to move to a price based on some semblance of value anytime soon, because there is no meaningful measure of value. It remains, for all intents and purposes, a coin toss driven by news and hope.

Players on both sides of the table should continue to tread lightly until the current quarter’s results are posted and the latest batch of shot interest is available, and even then handicapping HLF is going to take some serious guesswork.

In fact, the picture won’t become really clear until the middle of this year, after the April 8 deadline for an amended lawsuit has passed, and after the May 11 decision from a parallel court top accept or reject the company’s $15 billion settlement offer to its distributors.

Until then, it’s anybody’s guess.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/caution-hlf-still-roll-dice/.

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