Herbalife Ltd. Earnings: Will Icahn Beat Ackman?

On Monday, Herbalife (HLF -3.48%) will release its quarterly report, and investors will welcome the chance to focus on the fundamentals of the nutrition-focused business rather than the scrutiny the company has gotten lately. Even as Herbalife's woes have called into question the similar business models of peers Nu Skin Enterprises (NUS -1.84%) and USANA Health Sciences (USNA -1.28%), Herbalife still has to demonstrate to shareholders that it has a viable business model that can produce continued success for years to come.

Some see Herbalife as a pawn in the battle between investing giants Bill Ackman and Carl Icahn, with Ackman having accused Herbalife of being a pyramid scheme while Icahn has defended the company's status as a profitable, growing business. But Herbalife has now gotten attention from regulatory agencies and government entities at the federal and state level investigating whether its business model complies with all applicable laws and regulations. Can Herbalife overcome the distractions and still keep growing? 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.

Source: Herbalife.

Stats on Herbalife

Source: Yahoo! Finance.

Can Herbalife earnings keep growing?
In recent months, analysts have had mixed views on Herbalife earnings, cutting first-quarter estimates by $0.08 per share but raising full-year 2014 and 2015 projections by about $0.20 per share. The stock has whipsawed fiercely, falling more than 20% since late January.

Herbalife's recent earnings reports have actually been quite strong. In February, Herbalife announced results in two stages, with preliminary guidance showing much healthier growth than investors had expected. Final results showed a 20% jump in fourth-quarter sales and a 22% rise in adjusted net income, and Herbalife also raised its guidance for the 2014 year. CEO Michael Johnson pointed to the global obesity epidemic as driving greater need and use of its products, and Herbalife said it would boost its share repurchase authorization to $1.5 billion.

Source: Herbalife.

But earnings haven't been the primary focus for shareholders lately. In late January, Sen. Ed Markey called for the SEC and the Federal Trade Commission to investigate Herbalife's business practices, and the New York attorney general has also started an investigation. Earlier this month, reports that the FBI and the U.S. Department of Justice were conducting a criminal investigation sent Herbalife shares plunging, as the escalation from civil remedies to potential criminal penalties made shareholders even more nervous about Herbalife's future.

In addition, greater scrutiny on multilevel marketers generally has hurt Herbalife. In China, Nu Skin Enterprises was investigated for pyramid-scheme allegations, although the eventual punishment was so small that Nu Skin shares rebounded sharply after Chinese regulators announced it. USANA also took collateral damage in the episodes, and it has faced similar investigations in past years.

Still, many Herbalife investors have taken comfort in Carl Icahn's presence at Herbalife. Icahn took control of three more seats on Herbalife's board of directors in March, and he remains optimistic that Herbalife can weather the storm and demonstrate its legitimacy as a successful business. Yet Ackman hasn't relented in his case against Herbalife, even as news that he reimbursed legal expenses for whistleblowers at the company has made some people question his credibility.

In the Herbalife earnings report, watch to see how well the nutritional-products seller holds up in light of all the negative publicity it has received lately. With Herbalife relying on its distributors for its success, any signs of an exodus should show up in the financials and would likely bolster Ackman's short position. If distributors stick with Herbalife, though, then Icahn could win out, and the stock has plenty of room to grow if Herbalife can survive regulatory and legal scrutiny.

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