Will Herbalife Earnings Finally End the Ackman-Icahn Wars?

Herbalife (NYSE: HLF  ) will release its quarterly report on Monday, and shareholders have been pleased to see the stock's continued ascent from its lows late last year. Investors expect Herbalife earnings to grow from the year-ago quarter, and peers Nu Skin Enterprises (NYSE: NUS  ) and USANA (NYSE: USNA  ) have also seen huge share-price gains. But will Monday's earnings report be enough to put the final nail in the coffin of Bill Ackman's bearish position on the company, and prove bullish shareholder Carl Icahn and his Icahn Enterprises (NASDAQ: IEP  ) right?

Herbalife has drawn huge amounts of controversy for a long time, as its multilevel marketing business has Ackman and others accusing it of being a pyramid scheme. Yet, from a fundamental standpoint, the industry has been highly successful. Nu Skin rode success in China to strong earnings earlier this week, and USANA also reported solid results, albeit with negative guidance. The big question for Herbalife investors is whether the Ackman-Icahn battle will continue overshadowing Herbalife's fundamentals. Let's take an early look at what's been happening with Herbalife over the past quarter, and what we're likely to see in its report.

Stats on Herbalife

Analyst EPS Estimate

$1.14

Change From Year-Ago EPS

9.6%

Revenue Estimate

$1.19 billion

Change From Year-Ago Revenue

17.5%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Will Herbalife earnings keep on growing?
Analysts have kept raising their long-term views on Herbalife earnings, increasing their full year 2013 and 2014 estimates by between 3% and 4%, respectively. The stock's ascent has slowed somewhat, but it's still up 17% since late July.

So far, the entire Icahn-Ackman debate has gone Icahn's way, with Herbalife posting record earnings for its second quarter, and boosting its guidance for the rest of 2013. Revenue gains of 18% outpaced net income growth, but earnings still climbed 8%, and earnings per share climbed even more, due to a reduced share count.

Yet, an even more interesting twist to the battle came from reports that billionaire George Soros bought a stake in Herbalife, adding another bullish voice to the conversation, even after the stock's already impressive gains. Well-known hedge-fund investor Dan Loeb also participated in the stock, but Soros is famous even outside the investing world and, therefore, carries extra clout among the general public.

Until recently, Ackman has continued making his case. In August, he once again voiced his concerns about the stock, arguing that regulatory intervention against Herbalife is more likely than it was a year ago. He also noted that, if Herbalife distributors lose confidence in the company, an end to its business could come quickly. Investors in USANA and Nu Skin should also assume that a disastrous end for Herbalife could cause problems for their shares.

But earlier this month, Ackman said that he had covered more than 40% of his short position in Herbalife, likely replacing it with long-term out-of-the-money put options that have less risk of loss, but substantial profit potential if the stock gives up its recent gains. Yet, the move could put a new level of urgency on Ackman's position, as even long-term options expire and make it crucial not only that Herbalife shares drop, but that they drop sooner rather than later.

In the Herbalife earnings report, watch to see whether company executives comment on the ongoing litigation from former distributor Dana Bostick. The case has the potential to validate Ackman's bearish views, but Herbalife's biggest threat is if the Federal Trade Commission or other government regulators take steps to shut the entire business down. Barring that, Herbalife's fundamentals still look sounds.

Stay out of the fight
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Related Tickers

10/31/2014 4:03 PM
HLF $52.46 Up +1.90 +3.76%
Herbalife CAPS Rating: *
IEP $105.58 Up +2.05 +1.98%
Icahn Enterprises… CAPS Rating: *****
NUS $52.83 Up +0.01 +0.02%
Nu Skin Enterprise… CAPS Rating: **
USNA $113.98 Up +3.74 +3.39%
USANA Health Scien… CAPS Rating: *

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