Say what you want about Herbalife Ltd. (NYSE:HLF) and its so-called “pyramid” business structure — the nutritional supplement specialist knows how to keep things interesting.
Herbalife stock has been a loser over the past year, down more than 33%, against 9% gains for the Dow Jones Industrial Average.
And we can’t mention Herbalife stock without bringing up the name Bill Ackman, the superstar hedge fund manager and notable short of HLF. Ackman insists that Herbalife is nothing more than an elaborate scheme.
But with $5 billion in annual sales for 2014, Herbalife is fooling a lot of smart people fooled, if you believe Ackman. So heading into Herbalife earnings results Tuesday, the bears — with pitchfork in hand — were salivating for more losses.
Herbalife, however, had other ideas.
The Beat Heard Around the World
Helped by stronger-than-expected sales in China and higher volume in the EMEA regions (Europe, Middle East and Africa), Herbalife surprised Wall Street with first-quarter earnings that beat estimates by a wide margin, sending HLF stock up almost 15% after-hours.
This is the kick Herbalife bulls have been waiting for, which suggests that perhaps this business model has some staying power after all — much to the dismay of Mr. Ackman.
For the quarter that ended March, the weight management company posted adjusted earnings of $1.29 per share, topping estimates of $1.01 by almost 30%. Analysts were modeling for the low-end of HLF prior-stated guidance of $1.00 to $1.10 per share, displaying an astounding lack of confidence in the stock.
Here’s the kicker — Herbalife also raised its earnings per share outlook for all of 2015. HLF now projects earnings to be in a range of $4.30 to $4.60 per share, up from its previous range of $4.10 to $4.50 per share.
The Beat was Great, Yes. But…
All of that said, the numbers weren’t all flawless. First-quarter revenue of $1.11 billion was down 12% year over year. Though, even then, it was still enough to beat estimates by some $20 million. And that’s what the bulls should start paying attention to.
Sure, it’s fine to have your chest out today and breath a sigh of relieve as Herbalife stock soars. After three years of punishment, HLF investors deserve this victory. But the revenue decline — despite beating estimates — shouldn’t keep you up at night. Herbalife, which is projected to post a full-year revenue decline of almost 9% from the previous year, needs revenue to climb, not fall. It’s the only way to keep investors confident about Herbalife stock.
On Bloomberg Television Monday, Ackman predicted Herbalife would report “a very bad quarter,” adding “we expect continued deterioration of the business.”
So with full-year 2015 sales projected to fall 9% and full-year earnings projected to fall 29%, Ackman hasn’t been proved wrong yet — even with this quarterly beat. And let’s assume HLF does meet the mid-range of its full-year earnings guidance; that puts the number at $4.45 per share, marking a 25% year-over-year decline.
And the high-end range of $4.60? That’s still a 22% decline in earnings.
Now, regardless of which side you’re own when it comes to HLF stock, have your popcorn ready. This tug of war between the bulls and the bears have only just begun.
If you’re in the camp of Bill Ackman, whose certain HLF is a scheme, just wait. It’s not over. This quarter is just a hiccup. But if you’re on the other side of Herbalife stock, you’ll have some tough decisions to make. And they need to be made soon.
Sell Herbalife Stock Now
The way I see it, with HLF stock up 16% on these results, putting the stock in positive territory for the year, I would take my money and run. The earnings numbers are nice, for now. But cost-cutting and various financial engineering can do that.
Absent revenue to fuel future profits, I’m not willing to risk 16% gains — not with Ackman on the prowl.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
