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Bull of the Day

Shares of Herbalife, the nutritional supplements maker, surged about 10% on Friday after announcement of a settlement with the FTC. It has been a roller coaster ride for investors in this company that has been battling allegations about it being a pyramid scheme. What lies ahead for this stock?

About the Company

Founded in 1980 and based in the Cayman Islands, Herbalife (HLF) is a global nutrition company that sells weight-management, energy and fitness and personal care products through independent distributors in more than 90 countries.

The company employs over 8,000 employees worldwide and had net sales of $4.5 billion in 2015. 

Is the Worst Over After FTC Settlement?

In a statement issued Friday morning, the company said: “We announced a settlement with the F.T.C. that does not change our direct selling business model and will set new standards for the industry. We agreed to the terms and to pay $200 million because we simply wanted to move forward with our mission.”

Per FTC: “This settlement will require Herbalife to fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit.”

Even after the fine and rebuke from FTC, the settlement is excellent news for the company as it has avoided being classified as a pyramid scheme. The settlement does not change their business model as a direct-selling company. Also, according to the company, the terms of the settlement apply only to the US, which comprises about 20% of their net sales.

Epic Battle between Carl Icahn and Bill Ackman

Herbalife has been making headlines over the past three years as it was the subject of an epic battle between billionaire investors Carl Icahn and Bill Ackman. Ackman, manager of hedge fund Pershing Square, revealed his huge short bet against Herbalife in December 2012 calling it a pyramid scheme and asked the FTC to investigate the company. The FTC opened an investigation in March 2014.

On the other hand, Carl Icahn has been a big supporter of Herbalife. The company had granted Icahn the right to own up to 34.99% of its outstanding shares. He reportedly owns about 18.3% of the company’s stock currently. After the settlement, he said: “Now that the Company has reached a settlement with the FTC, it is time to consider a range of strategic opportunities, including potential roll-ups involving competitors, as well as other strategic transactions.”

The news could not have come at a worse time for Ackman whose fund is already down 20% this year as he has also lost a lot of money on his stake in Valeant (VRX). Valeant stock is down almost 80% this year while Herbalife is up about 22% now.  Pershing Square had lost about 20% of its value in 2015 too.

Excellent Q1 Results

The company reported better-than-expected first-quarter 2016 results, beating both on top and bottom lines, and also raised their guidance for the year.

Adjusted earnings of $1.36 per share beat the Zacks Consensus Estimate of $1.07 per share and were also above the guidance of $0.97–$1.07 per share.

Herbalife has beaten the Zacks Consensus Estimates in all of last four quarters, with an average positive quarterly surprise of 21.5%. In fact, as you can see from the following “Price & EPS Surprise Chart”, the company has missed only two times in last twenty quarters.

The Bottom-Line

In addition to a top Zacks Rank, the stock looks very good on style metrics too, with Zacks Style Score of “A” for both Value and Growth and “B” for Momentum, resulting in a VGM Score of “A”.

The company currently trades at a multiple of 12.31X forward earnings compared with 17.45 times for the industry, making it worth a look.
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