Herbalife isn’t a dead pyramid yet
While I understand the criticism toward pyramid schemes, it seems that Herbalife Ltd. (NYSE:HLF) may not necessarily fit the criteria for one, based on the strictly academic definition of a pyramid scheme.
Based on my research, I find it highly improbable that the company will reach the decline phase of its growth phase. Based on historical analysis, it could take 10, or even 20, more years for the company to report a year-over-year decline in net income. If that is the case, then there’s too much risk for shareholders to join the short on the stock with Bill Ackman. There’s a low probability that the company will actually be considered a pyramid scheme by the FTC, and that’s exactly what’s needed for the stock to crash. If the stock doesn’t crash, there’s no way a short position will make any money.
Most likely, Carl Icahn bought the stock because he tends to find value where no one is looking. The company is well on its way to sustaining earnings growth over the next two years. Analysts anticipate the company will grow earnings by 18% for the 2013 fiscal year, and 15.13% in the 2014 fiscal year. The company trades at a 10 earnings multiple, which implies that the company is heavily undervalued. The stock compensates investors with a 2.64% dividend yield.
Conclusion
I think there’s a high probability that Dell Inc. (NASDAQ:DELL) shareholders will vote in favor of Icahn’s special dividend proposal. Icahn’s position in Netflix, Inc. (NASDAQ:NFLX) will pay off, based on the company’s projected earnings growth and untapped market potential for movie streaming. I am also dubious of Bill Ackman’s claims that Herbalife Ltd. (NYSE:HLF) is a pyramid scheme. It could take decades before the company ever reports a loss, and by then, the whale of a short position that Bill Ackman has on the stock would have lost a lot of money.
I believe that Dell Inc. (NASDAQ:DELL) has the most short-term upside, as there’s an attractive arbitrage opportunity that could result in substantial short-term yields. Following that, Netflix, Inc. (NASDAQ:NFLX) has the most potential in terms of long-term appreciation. Finally, Herbalife is undervalued as an investment, relative to its projected growth, making it the third best of the three.
The article Michael Dell or Carl Icahn? originally appeared on Fool.com and is written by Alexander Cho.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix and has the following options: Long Jan 2014 $50 Calls on Herbalife Ltd. (NYSE:HLF). Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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