Herbalife Ltd. (NYSE:HLF) remains embroiled in a widely-publicized stockholders fight that started unfolding at the end of last year when activist investor William Ackman charged that Herbalife Ltd. (NYSE:HLF)’s agreements with distributors represents a pyramid scheme. Repercussions from these entanglements sent Herbalife Ltd. (NYSE:HLF)’s stock plummeting from $43.94 on December 14, 2012 to $26.06 just ten days later.
However, other companies have faced even more challenging litigation and managed to survive, or even to prosper. So, could Herbalife Ltd. (NYSE:HLF), which markets anti-aging products and nutritional supplements, follow their lead by putting its hard times behind it and coasting towards continued profitability? A quick glance at its fundamentals indicates it might have the financial heft to do just that.
Herbalife’s impressive fundamentals
Herbalife Ltd. (NYSE:HLF)’s operating cash flow for 2012 was $567,784 million. That figure pales in comparison with the $50,856 billion OCF Apple recorded during that same year. Yet, it is noteworthy because it represents a 46% increase from the OCF ($389,084 million) Herbalife Ltd. (NYSE:HLF) posted just two years earlier, a sign of ongoing growth.
OCF represents a measure of the amount of cash a company generates through it normal business operations. In calculating this statistic, net income is adjusted for items such as depreciation and changes to inventory. By stripping away the effect of accelerated depreciation or of a major sale for which it has not has not yet received payment, OCF provides a clear picture of a business’ ability to support its ongoing operations without becoming overly leveraged.
Another indication of Herbalife’s solid finances, its current ratio is only 1.93. This figure is calculated by dividing current assets by the amount in debts and other obligations a company owes within a year (current liability). Any company whose current ratio stands above 1.00 is thought to be heading into safe territory.
And Herbalife’s return on assets (23.34%) and return on equity (102.96%) point to the fact it enjoys effective management. The latter figure is particularly noteworthy, considering as the average return on equity for stocks in Warren Buffet’s Berkshire Hathaway portfolio during 2012 was approximately 28%. This group of companies is widely recognized for having strong fundamentals that can sustain them over the decades.
Herbalife’s PEG ratio for the next five years, meanwhile, is only .65. This term is defined as being the price/earnings ratio divided by estimated income over a certain period of time. Value investors who demand strong fundamentals are generally impressed when a company’s PEG falls below 1, interpreting that as being a sign it might be undervalued and due for a bump.
Two companies – Nu Skin Enterprises, Inc. (NYSE:NUS) and GNC Holdings Inc (NYSE:GNC) might be worth investors’ consideration. They share two major advantages with Herbalife: the items they sell, anti-aging products, are reaching an ever expanding market and they have impressive fundamentals. Yet, they are not facing the same legal challenges as Herbalife, complications that might continue to unnerve investors despite reassurances that Herbalife enjoys financial strength and the fact its stock price has rebounded in recent months since its December low.