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Up 70% In 2018, Is Herbalife a Buy?

By Nicholas Rossolillo - Updated Dec 27, 2018 at 8:22AM

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It’s been a big year for the nutrition supplement stock, but it’s time for more modest expectations.

Shares of Herbalife (HLF -4.29%) have raced 70% higher this year, smashing the broader stock market's 8% decline as of this writing. Hedge fund manager Bill Ackman said he exited his bet against Herbalife early in 2018; paired with rebounding sales and share repurchases, investors who believed in the nutritional supplements company should be quite pleased.

After a banner year, though, a repeat performance might be a tall order to ask.

2018 by the numbers

Ackman bet against Herbalife years ago because, as he said at the time, the company was a "pyramid scheme" whose stock would "go to zero." It's true that Herbalife distributes its product through multi-level marketing, selling through a network of independent members that earn income based on product sales and the recruitment of new members. However, as skeptical as many may be of the model, business regained traction over the past year both in the U.S. and abroad as the company worked to expand its membership. Sales are still off their peak back in 2014 prior to legal scrutiny and a $200 million Federal Trade Commission fine in 2016, but it's clear that Herbalife is far from broken.

Metric

Nine Months Ending September 30, 2018

Nine Months Ending September 30, 2017

YOY Increase

Revenue

$3.71 billion

$3.33 billion

11.4%

Royalty overrides and operating expenses

$2.50 billion

$2.27 billion

10.1%

Earnings per share

$1.64

$1.63

0%

Adjusted earnings per share

$2.24

$1.79

25.1%

Data source: Herbalife.

What's next in the playbook?

By the time 2018 is finished, management thinks total sales will have grown 10% to 11% over 2017, good for adjusted earnings per share between $2.74 and $2.84. Things at Herbalife could be due for a cool down, though. For 2019, sales growth is expected to ease to 2.8% to 6.8%, with adjusted earnings coming in between $2.70 and $3.10 -- flat to up as much as 9%. That guidance does exclude any impact from share repurchases; the board of directors recently approved a five-year program to repurchase up to $1.5 billion in stock, which is currently 18% of Herbalife's total market cap. But there's no certainty as to when repurchases might occur.

A woman in thought. An illustrated thought cloud with a bag of money has been drawn above her head.

Image source: Getty Images.

Based on the mid-point of adjusted earnings expectations for 2019, Herbalife is trading with a price to earnings ratio of 19.9. Unless the company buys a substantial amount of its stock next year, that is a bit pricey for a company that is expecting a sales slowdown in the low- to mid-single digits, and a best-case earnings increase of only 9%. For comparison, the S&P 500 index has a one-year forward price to earnings of 15.1, indicating Herbalife is trading at a premium.

I'm certainly not suggesting anyone short the company as Bill Ackman did. But after a big run-up in price in the last year, Herbalife stock looks like a better wait-and-see scenario than a jump on-the-bandwagon investment.

Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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