In December, billionaire Bill Ackman of Pershing Square (check out Ackman’s stock picks) gave an exhaustive short presentation on Herbalife Ltd. (NYSE:HLF). His core argument was that Herbalife, a multilevel marketing company whose distributors sell (or at least try to sell) weight management and nutritional products, simply does not offer a good value proposition to these distributors. This impacts the company in two ways. First, over time these distributors leave the business and sales dry up, forcing Herbalife Ltd. to constantly find new distributors (Ackman mocked the company for recently moving into Ghana, ostensibly out of desperation to find untapped markets). Second, the U.S. or other governments might shut down the company on legal grounds; while it operates globally, losing the U.S. market would have a severe impact on business. Read our analysis of Herbalife from late December and from last week.
Now Third Point, a hedge fund managed by billionaire Dan Loeb, has filed a 13G with the SEC to disclose a position of 8.9 million shares, or 8.2% of the company. With the current market cap at $4.3 billion (Herbalife plummeted as a result of Ackman’s presentation but has since recovered, though it is still down 16% from a month ago), that would be about a $350 million position. Third Point only reported three positions worth more than $350 million in its 13F for the third quarter of 2012, and no shares of Herbalife; we’d conclude that Loeb and his team have been very aggressive in buying the stock. See more stocks Third Point reported owning.
In the third quarter of 2012- before Ackman’s assault on the company- Herbalife Ltd. reported 14% revenue growth compared to the same period in 2011, with net income rising 9%. We’d note that the company has been in business since 1980; some of the criticism of Ackman’s short is that Herbalife would have folded long ago if its value proposition was so terrible. Even with the recent recovery- meaning that Loeb probably bought at a lower price than where the stock currently trades- the trailing P/E is 10 which would normally be considered low. Renaissance Technologies, founded by billionaire Jim Simons, and Ken Heebner’s Capital Growth Management had fairly large positions in Herbalife at the end of September.
How does Herbalife compare with similar companies?
We think that Avon Products, Inc. (NYSE:AVP), Nu Skin Enterprises, Inc. (NYSE:NUS), and Weight Watchers International, Inc. (NYSE:WTW) are comparable companies as they are either in a similar business or have a similar business model. Nu Skin and Weight Watchers would also generally be considered value opportunities, at least in terms of their value metrics: their trailing earnings multiples are in the 13-14 range. We’d note that both of these companies are popular shorts: 22% of Nu Skin’s outstanding shares and 13% of Weight Watchers’ are held short, somewhat comparable to 27% as of the most recent data for Herbalife. Avon has taken a recent hit to its earnings, and even sell-side expectations of a recovery at the company have its forward P/E at 17. This makes it a clearly pricier stock than Nu Skin, Weight Watchers, or Herbalife going by recent financials.
We think it’s important to note that short sellers do not have to disclose large positions and so it’s possible that other hedge funds have been joining Pershing Square on the short side of this trade. With that said, Ackman’s case against Herbalife apparently has done nothing to sway Loeb; in fact, he’s used the resulting pullback in the stock as an opportunity to make it one of his top picks after not owning any shares as recently as three and a half months ago.
Disclosure: I do not own shares of any stocks mentioned in this article.
