Herbalife Exceeds Expectations for the 21st Consecutive Quarter! Time to Buy?

Herbalife (NYSE: HLF  ) , the global nutrition company that has been accused of being a pyramid scheme on more than one occasion in the last month, has just reported record-setting first-quarter earnings that left analysts' expectations in the dust. This is the 21st consecutive quarter in which the company has surpassed expectations and the stock has reacted by making a slight move higher. Let's break down the report, take a look at Herbalife's outlook on the rest of the year, and check in on one of its competitors, Weight Watchers (NYSE: WTW  ) , to determine if we should be buying into the rally or if we should wait for a lower entry point. 

Source: Herbalife

Sliding past expectations once again
Herbalife released its first-quarter report after the market closed on April 28 and the results exceeded expectations on both the top and bottom lines; here's a breakdown:

Metric Reported Expected
Earnings Per Share $1.50 $1.29 
Revenue $1.26 billion $1.23 billion

Source: Benzinga

Earnings per share increased 18.1% and revenue increased 12.4% year-over-year, which equated to the best first quarter in Herbalife's history; here's a breakdown of the revenue by region:

Region

1Q 2014 Revs.

1Q 2013 Revs. Growth
Asian Pacific $280.50 million $311.75 million (10%)
North America $247.86 million $221.47 million 11.9%
South & Central America $244.62 million $219.52 million 11.4%
E.M.E.A. $211.14 million $169.59 million 24.5%
Mexico $142.66 million $132.89 million 7.4%
China $135.87 million $68.44 million 98.5%

Source: Herbalife 

These strong sales results were driven by worldwide volume growth of 9%, including 91% growth in China, 25% growth in Europe, the Middle East, and Africa, and 9% growth in North America. In the Asian Pacific, volume declined 6% and sales decreased 10%, but on the conference call, management said it expects this region to "return to positive volume growth over the course of 2014."

Source: Herbalife

Herbalife's gross profit rose 12.7% to $1.01 billion and the gross margin showed fight, expanding 20 basis points to an incredible 80.1%. This performance allowed the company to pay dividends of $30.4 million, invest $49.7 million in capital expenditures, and repurchase approximately 9.9 million shares of its common stock for $685.8 million.

Also, in a surprising move, the board of directors announced that it will be accelerating cash returns to shareholders going forward, and to do this, it is terminating its dividend and ramping up share repurchases during the second quarter. Herbalife expects to repurchase roughly $581 million worth of common stock during the second quarter, which is comprised of $315 million it already expected to use for repurchases, $216 million that would have been used to pay dividends over the next eight quarters, and $50 million included in previous guidance.

Overall, it was a great quarter for Herbalife and it got even better when it handed over its guidance for the full year...

Will the record-setting quarters keep coming?
In the report, Herbalife announced, "In addition, we are pleased to raise our expectations for the balance of 2014. This reflects our confidence that Herbalife is well-positioned to continue to grow and play an increasingly important role in improving nutrition and reducing obesity around the world." Here's the company's new guidance for the year:

Source: Herbalife

  • Earnings per share in the range of $6.10-$6.30, an increase of 13.6%-17.3% from fiscal 2013
  • Revenue growth of 10%-12%
  • Volume growth of 8%-10%

If these estimates are accurate, they would result in a record-setting yearly performance.

Herbalife's stock reacted to all of the earnings news by rising more than 2.2% in the trading session that followed and I believe it would have been a much greater run if the company were not being actively investigated by the F.B.I. and two state attorneys.

With this being said, due to the ongoing investigations, I believe Herbalife is too risky to invest in today; however, Foolish investors should keep this stock on their radar, as it could represent a great opportunity following the conclusion of the investigations.

A competitor puts out great results of its own
Weight Watchers, the world's leading provider of weight management services, released first-quarter results of its own on April 30 and it too surpassed analysts' expectations; here's what the company accomplished: 

Metric Reported Expected
Earnings Per Share $0.38 $0.09
Revenue $409.40 million $399.20 million

Source: Benzinga

Weight Watchers' earnings per share decreased 56.3% and revenue decreased 16.6% in comparison with the year-ago period. Total paid weeks by customers decreased 13.9% to 47.5 million and the total number of active subscribers at the end of the quarter was approximately 3.65 million, a 13.7% decrease year-over-year. 

Source: Weight Watchers

The quarterly results were better than Weight Watchers had anticipated, which allowed it to raise its full-year guidance for fiscal 2014; the company is now calling for earnings per share in the range of $1.45-$1.70 while it had previously expected $1.30-$1.60. 

Although the results exceeded expectations, it was still a very disappointing quarter of negative growth for Weight Watchers; regardless, its stock has reacted by soaring over 25% higher in the trading session. This rally may continue for the next several days or even weeks, but I would not be a buyer of it at any level. I think the steep drop in active members and attendees at the company's meetings is a major red flag and a Foolish investor should not consider risking an investment.

The Foolish bottom line
Herbalife has just burned past analysts' expectations in its first-quarter report and its shares have responded by rising. The good news did not stop there, as the company then raised its outlook on the full year to point toward a record-setting performance. Even though this usually indicates a company that we want to invest in, Herbalife is being investigated by the F.B.I. and two state governments for the possibility of being a pyramid scheme, so Foolish investors should stay far away today. Once the investigations reach conclusions and the investigators release their results to the public, we can then use the information provided to make an educated decision on whether or not Herbalife is safe and if it should have a spot in our portfolios. 

As the war for your health continues, so does another
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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.

  • Report this Comment On May 05, 2014, at 4:54 PM, powershake wrote:

    Two more prominent activist hedge fund managers said that they do not have any issues with Herbalife's business model. http://www.cnbc.com/id/101626267

    Lawyers speaking on the possible FBI probe of HLF say - "If Herbalife is unaware of the investigation, it's possibly a sign that the probe has not yet reached a critical stage." http://www.itbusinessnet.com/article/Jeff-Ifrah-of-Ifrah-Law...

    However, Ackman received a Subpena from SEC!!! That means the probe has passed the critical stage!!! SEC will investigate why Ackman received Senators letter before the FTC got it.

    Ackman, foolishly posted the letter on his website one day before the FTC received it. The NY TIMES wrote about it. Large PUT where bought and millions made - we'll see how things materialize on this by the SEC or even the FBI

  • Report this Comment On May 05, 2014, at 5:59 PM, JoeySolitro1 wrote:

    Very interesting powershake

  • Report this Comment On May 06, 2014, at 9:11 PM, lovinggrandpa wrote:

    What a bully Ackman is!!! Bill Ackman should be investigated! innocent until proven guilty. Just cause some Ass with a lot of money want to take down a company dose not mean they are guilty of anything. It's an investigation, just cause Ackman hopes they find something doesn't mean jack! Typical uniformed people that hear a company is being investigated and want to jump on a a band wagon and point the bad finger with ABSOLUTELY nothing have been found to proven illegal. To mention 2 audits came up clean and OK, but no one wants to talk about that now do they....

  • Report this Comment On May 07, 2014, at 1:58 PM, earlcarroll wrote:

    meanwhile back at the ranch THE STOCK WAS UP TODAY.....bill stiritz, carl Icahn, George soros and several other billionaires who are long the stock and selling puts have done their own investigation...this group of billionaires have a lot better investigators, lawyers, and analysts than the government could ever hire.. do you think Icahn would have put so many on the hlf board if he had not done a thorough investigation...DUE DILIGENCE..it is what these billionaires do and they do it very well, ackman on the other hand NOT SO MUCH I use j c penny , target. and now hlf as my examples...these billionaires just keep selling puts and the puts just keep expiring worthless.. and once these investigations end and hlf gets a fine and a slap on the wrist the stock goes to 100 bucks a share and all the shorts will be SQUEEEEEZED lie volkswagon was..this is going to make a great movie once it is over....one more thing...only 18 percent of hlf sales are in the united states so WHAT IS THE WORST POSSIBLE OUTCOME?? they lose 18 percent of there sales...IT IS NOT POSSIBLE FOR IT TO GO TO ZERO

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