Herbalife (HLF) is caught in controversy as the company has been reeling with several allegations, mainly from activist investor William Ackman. Ackman put a $1 billion bet against Herbalife shares in December 2012, stating that the stock is worthless. Since then, he has been trying continuously to take the company down. On the contrary, Herbalife shares have jumped 34% since December 2012 on the back of robust results.
The impressive performance has forced critics to rethink about the company’s strategies that are rewarding it so well. So, let’s have a closer look at the financial performance of Herbalife.
How Herbalife is doing?
The financial performance for the recent quarter wasn't impressive. Although revenue increased 13% year over year, net income declined sharply by 37%. However, a volume increase of 9% enabled the company to record $1.3 billion of sales. Actually, net sales in the U.S. jumped 8% in the first quarter, and March recorded the largest sales in Herbalife's U.S. history, enabled by a whopping 83,000 new members. Globally, during the first quarter, theaverage active sales leaders increased 11%, coupled with 24% increase in the number of new members.
In 2013, Herbalife managed to retain a record 216,459 of its sales leaders, as compared to 196,732 in the year 2012.Additionally, the company is taking extra efforts to drive its volume point per capita penetration by way of regionalization, systemized training, sharing of daily consumption business practices among customers, along with city by city initiatives.
Further, the daily consumption is expected to accelerate on the account of the company’s Nutrition Club activities in markets such as Korea and Mexico. In total, the company has 78,000 Nutrition Clubs across the world, which are constantly engaged in integrating daily consumption business methods such as Fit Clubs to their core service offerings.
Herbalife is also witnessing increasing interest, dedication, and excitement among members across the world as seen through several events like regional extravaganzas, summits, honors, and anniversary events. In 2013, Herbalife recorded 200,000 members participating in these events, and expects these numbers to grow enormously in the current fiscal.
Apart from this, the company launched a new skincare line having 10 new paraben-free products. These products were demonstrated in 2 extravaganzas held in Las Vegas and Los Angeles, having greater than 10,000 members attending the events. Going forward, Herbalife can benefit from the growing awareness regarding healthy living through its strategies that include selling weight management, healthy meals and snacks, sports, and fitness, energy and nutritional products, and personal care products globally.
Herbalife has a solid valuation
Herbalife looks promising from a valuation point of view as well. The stock has trailing P/E and forward P/E ratios of 13.59 and 8.61, respectively. Additionally, the PEG ratio is healthy at 0.50, and reflects steady and stable growth in the long run. Otherwise, the company has robust operating cash flow of $826 million and levered free cash flow of $486 million. Analysts are also positive regarding Herbalife's long term growth prospects, with an estimated earnings CAGR of 19% for the next five years.
Hence, Herbalife looks interesting from an investment point of view. Still, the controversies and the troubles that surround the company cannot be taken lightly.
Herbalife is a multi-level marketing ((MLM)) company. The members are paid only when new members are recruited, and it’s believed that the company is least focused on the product. Ackman recently brought to light a 13-minute video depicting interviews with former distributors stating that Herbalife victimized them.
Although Herbalife denies these allegations and describes them as negative propaganda, investors looking for an investment in the company based on its actual business and expected growth should be careful.
Herbalife is a high-risk-high-return bet to play. The company could be a good investment If Ackman is proved wrong, and the various probes that are reeling Herbalife are found to be incorrect. But, it could become a dead investment If they are right.