Herbalife's Sharp Decline Is Your Opportunity

Herbalife has pulled back after Nu Skin was accused of being a pyramid scheme in China, leaving investors scratching their heads and wondering what to do.

Jan 18, 2014 at 8:30AM

Herbalife (NYSE:HLF) has been in the spotlight ever since the very popular "Battle of the Billionaires" occurred on national television in February of 2013. In this "battle," Bill Ackman claimed the company was a pyramid scheme and was short the stock, while Carl Icahn took the opposite side and thought the weakness Ackman caused was a buying opportunity. It has since rallied much higher, but is being hit by another wave of negativity at the hands of the Chinese government. Let's take a look at the situation and see what investors should do now.

The nutritional supplier
Herbalife is a global nutrition company that offers its products through independent distributors in more than 80 countries. It offers products for targeted nutrition, weight management, energy and fitness, meal replacement, skin and hair care, and kids' nutrition. Herbalife is also home to one of the best management teams in the industry that continues to innovate in order to keep up with consumer demands and trends.

Hlf Company Media Relations

The situation
Herbalife began falling on Jan. 16 after the market was hit with news that Nu Skin (NYSE:NUS), the skin care and nutrition company, was being investigated by the Chinese government for illegal business practices. Chinese authorities believe Nu Skin is not acting as a multi-level marketer, but as an illegal pyramid scheme, making false promises to draw new clients in as distributors; China does not take a situation like this lightly and could ultimately shut down Nu Skin's operations entirely.

Screen Shot

Nu Skin's stock was trading at its 52-week high of $140.50 on Jan. 13, but it has since fallen more than 45%. The company put out a press release acknowledging the investigation and noted that sales in China will be negatively affected, but that it is doing everything in its power to resolve the situation. I do not think investors should get involved in Nu Skin until Chinese authorities make their final decision, because China has made up 41.3% of Nu Skin's total sales to-date in fiscal 2013. However, I am interested in a closer look at Herbalife, who was hit since its business model is seen as similar to that of Nu Skin. 

Herbalife's sharp decline
Herbalife was trading at its 52-week high of $83.51 on Jan. 8 and investors saw a strong year ahead, until Nu Skin ruined the fun. On Jan. 16, Herbalife declined 9.76% and continued its fall the following day, falling as much as 4.7% before rebounding slightly. Seeing the weakness, Bill Ackman took another jab at Herbalife and put out a press release claiming that it too was operating illegally in China; I do not think Ackman's claims will be acted on, but it did cause an initial reaction in the stock.

Screen Shot

So is it time to buy?
Yes, I believe the decline in Herbalife is a buying opportunity because it is a value play based on both current and forward earnings. Nu Skin issues aside, Herbalife has reported three record-setting quarters in fiscal 2013 and I believe the fourth-quarter will be of the same sort. Take a look at what the company has accomplished fiscal-year-to-date:

First Quarter:

Metric Reported Expected Year-Over-Year Growth
Earnings Per Share $1.10 $1.07 25.00%
Revenue $1.12 billion $1.12 billion 16.54%

Second Quarter:

Metric Reported Expected Year-Over-Year Growth
Earnings Per Share $1.41 $1.18 29.36%
Revenue $1.22 billion $1.16 billion 18.15%

Third Quarter:

Metric Reported Expected Year-Over-Year Growth
Earnings Per Share $1.41 $1.14 43.9%
Revenue $1.21 billion $1.2 billion 19.34%

These earnings supported a 138.92% run in 2013 and it could have another rally of high magnitude following Nu Skin's resolution with the Chinese authorities. The run could be even higher if Herbalife can continue growing earnings by over 25% each quarter as it did in the first three quarters of 2013. Fourth-quarter results are due out on Feb. 18 and a beat could be the true turning point in the stock if it continues to show weakness during the investigation. With this being said, I would wait until the selling subsides or until the earnings report before initiating a position.

The Foolish bottom line
Herbalife is a worldwide powerhouse that is simply caught in the crossfire of another company's battle. I believe the decline is a buying opportunity and Herbalife's earnings in fiscal 2013 support this opinion. Investors should wait for the selling to subside before initiating a position, or until its earnings are released, but not too long after, as the spike higher could happen just as fast as the decline lower did.

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Joseph Solitro has no position in any stocks mentioned. The Motley Fool has the following options: long January 2015 $50 calls on Herbalife Ltd.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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