Our hesitation to go all in on the Herbalife short is that Herbalife’s fundamentals appear strong. The stock pays a 4.4% dividend yield that is well covered with free cash flow and long-term expected growth is robust as exhibited by a 5-year expected earnings growth rate of 15%. We are also encouraged by the fact that more than 70% of sales come from outside the U.S., with growth drivers being Mexico, South & Central America and Asia Pacific.
A few of Herbalife’s big multi-level marketing peers include Avon Products, Inc. (NYSE:AVP), Nu Skin Enterprises, Inc. (NYSE:NUS), Weight Watchers International, Inc. (NYSE:WTW) and Medifast, Inc. (NYSE:MED). These MLM companies have held up surprisingly well following Ackman’s acquisitions. Ken Fisher took a new position in Avon last quarter (check out all of Ken Fisher’s newest picks).
A number of billionaires still love these multi-level marketing companies, and investors have refrained from selling off despite Herbalife-related concerns. Nu Skin is down the most of Herbalife’s competitors at 25% over the last month, and Avon is down the least at only 2%. Israel Englander and D.E. Shaw were two of the top-name investors in Nu Skin (see D.E. Shaw’s hottest picks here).
Weight Watchers, meanwhile is the largest provider of weight control programs in the world and next to Herbalife, it trades the cheapest on a forward P/E basis at 11x. Billionaire Ken Griffin – founder of Citadel Investment Group – is now one of Weight Watchers biggest shareholders after increasing his stake over 1000% last quarter (check out Ken Griffin’s biggest bets).
Medifast operates Jason Pharmaceuticals, which produces consumable health and diet products. These include weight management and sports nutrition pharmaceuticals. Medifast trades at the most expensive forward P/E (18x) of the five MLM companies listed here. Billionaire Steven Cohen of SAC Capital was a key investor in Medifast last quarter (check out Steven Cohen’s top picks).
In short, we remain cautious on Ackman’s statement that Herbalife could hit his $0 price target. If this doomsday scenario does occur, the fallout will be far reaching; the nutrition company has about 2.7 million distributors. It is tough to think Ackman will be able to bring down a 30-year old company with over $4 billion in revenue mostly on his own. Ackman’s allegations and ad-hoc analysis are not exactly a ‘smoking-gun’ given it will take a higher power to actually label the company a fraud. The SEC found no issues with Herbalife’s business model in its 2008 analysis of the company.
Here’s some additional coverage of this ongoing situation:
Did David Einhorn Short Herbalife Ltd. (HLF) With Bill Ackman?
Ackman Has Made At Least $250M From Herbalife Ltd. (HLF) Short, Will Give His Profits to Charity
Herbalife Ltd. (HLF) Hammered Again, Ackman’s Four Pillars of a ‘Pyramid Scheme’
