Bull of the Day: Herbalife (HLF)

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 Beats Estimates in Six Straight Quarters

Herbalife topped the Zacks Consensus Estimate in each of the last six quarters with the smallest beat coming in the most recent quarter. The largest percentage beat of the last six was the December 2011 quarter which came in 17.8% ahead of the Zacks Consensus Estimate.

The September 2012 quarter was the most recent report and came just weeks before Pershing Square's Bill Ackman called the company a pyramid scheme. The company reported earnings per share of $1.04 when the Zacks Consensus Estimate called for $1.01. That means a beat of $0.03 or 3%. The stock traded flat in the session following the release. Revenue was $1.017 billion, compared to the Zacks Consensus Estimate of $999 million.

Herbalife the target of short seller Bill Ackman

In a mid-December conference, Bill Ackman disclosed that he is 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.

Toll Brothers Sees Estimates Moving Higher

Estimates for Herbalife have been rising of late. The Zacks Consensus Estimate for 2012 for HLF stood at $3.60 as of February 2012. The consensus since moved higher to $4.03. Over the same time period estimates for 2013 have moved from $4.08 to $4.64. The implied earnings growth rate of more than 15% is great for a company that has been around for more than 30 years and has a mature product.

Valuation

Herbalife trades at some very attractive multiples. The trailing twelve months PE of 9.2x is just about half the 18.1x industry average. Similarly, the 7.7x forward PE multiple is also right around half the 14.8x industry average. That is a significant discount to the market. Price to sale of 1x has the company trading at a premium to the industry average of 0.4x. The recent depression in the stock price has been the single largest factor in making these multiples move to such attractive levels.

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.

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 Follow The Money Trader a trading service that tracks institutional money flows and looks for great stock picks from that data.

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