Herbalife's Sharp Decline Is Your Opportunity

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.

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.

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.

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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  • Report this Comment On January 19, 2014, at 8:01 AM, Tony3364 wrote:

    My concern is Herbalife's financial status, because they MUST be going broke or something because my fiance' signed up with one distributor in March or April of last year, AND then only 3 or 4 months later, she signed up with her cousin's wife who was telling her about how much weight she could lose with Herbalife, yet Herbalife's billing system or their computer did NOT even catch that she was ALREADY a distributor WHEN THEY ENTERED HER SSN? REALLY???

    This company needs to be reported to the IRS or something because AFTER my fiance' got their product back in JULY of LAST year, that was SIX months ago... AND called & let them know that they needed to credit her account because she was ALREADY a distributor, yet their faulty billing system did NOT catch that & RE-BILLED her ANOTHER $86.37???

    Then she sends back EVERYTHING BUT the shake mix BACK to them AND her cousin's wife even says they got everything BUT the shake mix back, & she told her cousin's wife that she kept the shake mix because she still has another 50+ pounds to lose, so for her to PLEASE just HAVE THEM charge her the distributor rate & credit her account for the difference, yet they did NOTHING???

    Then, she called Herbalife after waiting for the credit to appear for OVER 3 months and they said they were SOOOO SORRY for their mix-up & would credit her account AND send her 3 shake mixes for FREE, yet yo this day...She has received NOTHING!!! No shake mixes OR credit to her account????

    Would someone PLEASE help her get this resolved ASAP?

  • Report this Comment On January 19, 2014, at 9:00 AM, thedubliner wrote:

    i am an independent hlf distributor myself and from what you are describing, it seems your gf purchased products from an hlf independent distributor. So the errors you are reporting are made by the distributor himself and not from herbalife.

    on the internet there are so many website of herbalife distributors that for the novice it is difficult to tell which one is herbalife and which one is of independent distributors

    if you really believe there is something wrong, then contact herbalife (the company) directly yourself +13102167770

    hope this heps,

    Danilo

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