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A Look at Herbalife's Business Fundamentals

By Dan Caplinger - Apr 25, 2013 at 2:45PM

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The company announces earnings next Monday.

Next Monday, Herbalife (HLF 7.08%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed kneejerk reaction to news that turns out to be exactly the wrong move.

Herbalife has been the subject of a huge debate among major investors over the past several months, some of whom think that the company is a pyramid scheme, while others believe that it's a lucrative business with great growth opportunities. But, beneath all the hype, the company's financials are an objective way to assess the business and its potential. 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 quarterly report.

Stats on Herbalife

 

 

Analyst EPS Estimate

$1.07

Change From Year-Ago EPS

22%

Revenue Estimate

$1.12 billion

Change From Year-Ago Revenue

16%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Can Herbalife's earnings live up to what bulls want to see?
Analysts have been guardedly optimistic in recent months about Herbalife's earnings prospects, raising their estimates for the just-ended quarter by a penny per share, and adding $0.02 to their per-share earnings calls for the full 2013 year. The stock, though, hasn't shared that enthusiasm, falling 14% since mid-January.

Herbalife has had to deal with many outside distractions recently. The ongoing high-profile fight between Bill Ackman and Carl Icahn reached new heights during the quarter, as Icahn Enterprises (IEP 0.70%) named two new representatives to Herbalife's 11-member board of directors. As if that weren't enough, Herbalife found out earlier this month that auditing firm KPMG would have to resign from working for Herbalife after an insider-trading scandal inside KPMG called its audit reports for the past three years into question.

Yet fundamentally, Herbalife is a business that depends on nutrition and weight management for its profits. Recent trends favor that focus, as restaurant chains like Chipotle and Panera have captured substantial new business from the desire for healthier eating options, while much of the growth in organic grocery specialist Whole Foods has come from greater health awareness. Herbalife has tried to tap into healthier trends, as well with its products.

Surprisingly, though, many weight-management-related businesses have struggled to grow. Despite an obesity epidemic, investors expect neither Weight Watchers nor NutriSystem to grow their revenue this year. In that light, Herbalife's double-digit expected sales growth is remarkable, although it's consistent with respectable rates of increasing revenue at retail nutrition specialist GNC Holdings.

In Herbalife's quarterly report, look past all the controversy to find out more about its plans for marketing its products during the coming summer high-season. If its recent Six Weeks, Six Pounds release is indicative of its overall strategy, then the emphasis toward building long-term customer relationships rather than get-slim-quick tactics could match up well with its business structure.

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Stocks Mentioned

Herbalife Ltd. Stock Quote
Herbalife Ltd.
HLF
$22.55 (7.08%) $1.49
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Icahn Enterprises L.P.
IEP
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