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Herbalife Ltd. (HLF): “Pyramid” Scheme Is Outperforming

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Herbalife Ltd. (NYSE:HLF)The company accused of being one large fraud continues to outperform and reward shareholders in the long run. Embattled Herbalife Ltd. (NYSE:HLF) has been fighting with Bill Ackman over whether or not it is a pyramid scheme. Considering that Herbalife as been operating in the U.S. since 1980, let’s assume that they are at least somewhat legal (at the very least) and that it is worth looking at the company’s fundamentals and latest earnings.

Beat and a raise

Herbalife Ltd. (NYSE:HLF) beat earnings expectations and hit the high end of the revenue growth. Herbalife posted 9.9% income growth and 17% sales growth, and raised its forecast for the year to $4.60-$4.80 from $4.45-$4.60.

When you adjust for legal expenses resulting from Bill Ackman and Venezuela’s currency devaluation, Herbalife would have made $1.27 per share. When a company continuously beats earnings and raises its forecast, you’d figure that investors would reward it. But, due to the regulatory investigation, Herbalife Ltd. (NYSE:HLF) has fallen 45% over the past year, while the S&P 500 has gone up 13.5%.

Herbalife competitors

USANA Health Sciences, Inc. (NYSE:USNA) is a multilevel marketing company, like Herbalife, and it also recently posted earnings. It, too, beat earnings estimates and raised its full year guidance from $5.10-$5.25 per share to $5.25-$5.40 per share.

One thing to watch out for with USANA Health Sciences, Inc. (NYSE:USNA) is that its revenue missed and its revenue expectations are just at the midpoint of what analysts were expecting. What propelled its earnings to grow by 42%, and not something lower, was a 10% decrease in the number of shares outstanding due to an aggressive stock buyback program and lower incentive payouts. While the company is still becoming more profitable, its sales aren’t keeping up with its fast growth (9.7%) and should be watched.

With these two companies beating, one could guess that Nu Skin Enterprises, Inc. (NYSE:NUS), another multilevel marketing company that sells nutritional products, has a good chance of beating expectations. Nu Skin Enterprises, Inc. (NYSE:NUS) saw its Q1 profit rise to $0.90 per share (beating estimates for $0.79) and its revenue rise to $550.1 million, $45 million above estimates. It also raised its full-year forecast and now sees revenue of $2.51 billion to $2.54 billion, $190 million above the previous estimate. On the income side, the company also raised its forecast, now seeing $4.18-$4.30 per share, versus $3.72-$3.92 a share it was expecting in February. It is always a good sign when both you and your competition are beating expectations and raising outlooks, and it means that there is a bigger pie for everyone.

All three of these companies trade at low PE ratios and should see PE expansion if they raise guidance and have regulatory concerns disappear. All three of these companies are expected to grow their EPS between 12%-18%, so at those PE ratios, clearly they are undervalued and are trading at a discount over uncertainty. When the investigation ends and it is ruled that Herbalife Ltd. (NYSE:HLF) isn’t a pyramid scheme, all these MLMs should see PE ratios around the 15-20 level, the same level similar companies get for 15% growth rates.

Even just a PE ratio of 15 would boost Herbalife’s stock price by 50%, and USANA’s by 30%. Nu Skin already trades at a PE of 15 (with a low forward PE of 12), but is growing at a faster rate and should see a PE ratio of 18, which would push its stock up by 20%.

Bill Ackman

Bill Ackman seems very sure that Herbalife Ltd. (NYSE:HLF), which has been around for over 30 years, is a pyramid scheme and has placed a $1 billion bet against Herbalife. Carl Icahn, on the other hand, is bullish on Herbalife, has gotten into numerous arguments with Ackman, and has a large bet on Herbalife being legit.

Bill Ackman is the single largest obstacle for Herbalife Ltd. (NYSE:HLF) and should be closely watched, as he pushes for the SEC and FTC to file a lawsuit against the company, or engage in some sort of disciplinary action.

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