On February 25, we took a look at the feud between Carl Icahn and Bill Ackman on Herbalife (NYSE:HLF) in the article Carl Icahn Vs. Bill Ackman: Who Has it Right? To summarize, Bill Ackman, who is the founder and CEO of Pershing Square Capital Management, publicly stated that he had a $1 billion short position in Herbalife and made accusations that the company operated as a pyramid scheme.
Herbalife shares were hit hard on this news, until Carl Icahn came to its defense and stated that he did not like how Ackman handled the situation nor did he believe that Herbalife was a scheme of any sort. Icahn amassed a long position of over 14 million shares and investors were left with the decision to buy, short, or avoid the battleground entirely.
After thorough research and analysis, I saw no indications of a pyramid scheme, but more of a program that people joined to gain access to discounts on the company's nutritional products. At the time, Herbalife actually stated that 73% of its independent distributors only signed up to receive discounts and 71% of them never recruited other distributors. The company also said that 88% of its distributors had not received payments in 2012. In my opinion, these are clear indicators that the company does not operate or attempt to portray a pyramid scheme in any way.
Since the article on February 25, Herbalife has risen 93.99% from $35.63 to $69.12. It is up 114.66% year-to-date, making it one of the best performing stocks in the market. Even with this run, the stock trades at just 15.27 times earnings and 12.21 times forward earnings. I do not think the stock is anywhere close to slowing down.
Earnings to back us up
Herbalife has released quarterly results twice since late February; it reported first quarter fiscal 2013 earnings on April 29 and second quarter earnings on July 29. Let's take a look at these results:
|Earnings Per Share||$1.10||$1.07||25.00%|
|Revenue||$1.12 billion||$1.12 billion||16.54%|
|Earnings Per Share||$1.41||$1.18||29.36%|
|Revenue||$1.22 billion||$1.16 billion||18.15%|
Both the first and second quarter reports were record-setters for the company, showing continued strength in all areas of business. After both releases, management raised the company's full-year outlook, showing investors that business has been not affected by Ackman's accusations one bit. Strong earnings have played an instrumental role in fueling Herbalife's rising stock price.
Poor Bill Ackman
It is safe to say that Bill Ackman was wrong by shorting Herbalife. Last week, Ackman announced that Pershing Square has reduced its short position in Herbalife by about 40% in an attempt to limit future losses. He still believes the company is a pyramid scheme and it will eventually fall, but the move was necessary at this time. With that said, Herbalife has been just one of the major losses Ackman's firm has taken...
Pershing Square held an estimated 18% stake in J.C. Penney (NYSE:JCP) which had been built up over the course of the last three years. However, the stake was recently sold for a loss of about $473 million. It was a huge loss, but this was actually a very smart move because the stock has fallen another 39% from Pershing's selling price. J.C. Penney has fallen below its book value of $10.52 according to both Yahoo! Finance and YCharts, but I would not try to catch this falling knife. The company is in serious trouble and it could become the next big bankruptcy victim.
Carl Icahn: A shining star
Carl Icahn and his company, Icahn Enterprises (NASDAQ:IEP), have been able to do no wrong as of late. It has been making billions of dollars thanks to Herbalife and several other active positions, like Netflix, Apple, and Chesapeake Energy. As an activist investment firm, it seems that Icahn Enterprises can turn around just about any company. This success has been shown in the price appreciation of the stock and the bountiful 5.80% dividend it now pays. It would not be a bad idea for investors like us to follow Icahn's lead and use his investments and his company's investments as a basis for our own portfolios.
The Foolish bottom line
Herbalife is set to report third quarter earnings on October 28 and it looks like it will be another record setter for the company. It is currently trading 7.77% below its 52-week high, but the issues in Washington D.C. should provide further weakness in the market and an even better entry point for investors. Keep an eye on this one and see if there is a spot for it in your portfolio.
Joseph Solitro has no position in any stocks mentioned. The Motley Fool recommends Apple and Netflix. The Motley Fool owns shares of Apple and Netflix and has the following options: long January 2015 $50 calls on Herbalife Ltd.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.