Is Herbalife Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Herbalife's (NYSE: HLF  ) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Herbalife's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always be reported at a steady rate, we'll also look at how much Herbalife's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Herbalife's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Herbalife managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it's to earn our approval.

Healthy dividends are always welcome, so we'll also make sure that Herbalife's dividend payouts are increasing, but at a level that can be sustained by its free cash flow.

By the numbers
Now, let's take a look at Herbalife's key statistics:

HLF Total Return Price Chart

HLF Total Return Price data by YCharts

Passing Criteria

3-Year  Change*

Grade

Revenue Growth > 30% 71% Pass
Improving Profit Margin 53.2% Pass
Free Cash Flow Growth > Net Income Growth 120% vs. 150.6% Fail
Improving Earnings per Share 158.7% Pass
Stock Growth (+ 15%) < EPS Growth 248.8% vs. 158.7% Fail

Source: YCharts. *Period begins at end of Q2 2009.


HLF Return on Equity Chart

HLF Return on Equity data by YCharts

Passing Criteria

3-Year Change*

Grade

Improving Return on Equity 30.7% Pass
Declining Debt to Equity 106.6% Fail
Dividend Growth > 25% 200% Pass
Free Cash Flow Payout Ratio < 50% 27.2% Pass

Source: YCharts. *Period begins at end of Q2 2009.

How we got here and where we're going
Herbalife turns in a respectable performance, with six of nine possible passing grades. Its stock price may have run away from the growth in its bottom line, but Herbalife still only has a P/E of 14 today. With another good year of growth, the company could easily pick up another passing grade or two. Watch out for the company's debt levels, which shot higher in its latest quarter as it borrowed heavily to maintain share repurchases -- a poor strategy for increasing shareholder value, in this writer's opinion.

The biggest story of the past year for Herbalife hasn't revolved around its earnings or its guidance. Rather, Herbalife's stock suffered a precipitous drop after notorious short-seller David Einhorn jumped into its quarterly earnings call, with questions that led market participants to suspect an impending short. That was all it took to tank the stock by over 20%. Thus far, Herbalife's post-drop progress has been far more encouraging than previous Einhorn target Green Mountain Coffee Roasters, which started a long decline that's only recently begun to reverse.

The drop also brought Herbalife's valuation metrics more in line with other health-product peers, and it's now less costly than GNC Holdings (NYSE: GNC  ) , with a higher profit margin and dividend yield to boot. A close comparison to other direct-sales and network-marketing companies puts Herbalife head and shoulders above Avon Products (NYSE: AVP  ) and Blyth (NYSE: BTH  ) , which maintain much higher levels of operating expenses and offer lower expected forward growth rates.

Herbalife, for its part, is following the old adage that "success is the best revenge." Its latest earnings were just as strong as the previous quarter's, setting new records and enabling executives to boost their full-year guidance. However, short interest remains elevated after the Einhorning, so any unexpected bad news could easily cause another precipitous drop.

Putting the pieces together
Herbalife has a number of qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Herbalife's been a great under-the-radar success story, but it's hardly the only hidden gem on the Fool's radar. Our analysts have uncovered three "Middle-Class Millionaire-Makers Wall Street's Too Rich to Notice," which combine the strong growth and popular products that have made Herbalife so successful. You can find out more in our free report -- just click here to get the information you need, at no cost.

Keep track of Herbalife by adding it to your free stock Watchlist.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended creating a bear put spread position in Green Mountain Coffee Roasters. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2044049, ~/Articles/ArticleHandler.aspx, 10/22/2014 9:00:57 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement