Pershing Square, led by Bill Ackman (Trades, Portfolio), waged one of the most spectacular public activist campaigns against Herbalife (HLF, Financial) on the premise it is a pyramid scheme.
In the recent earnings call Ackman reiterated some of the points he has made previously (and he made a lot of points) but also pointed out several important potential catalysts that each individually could impact the viability of the nutritional supplement MLM company:
Last Week Tonight with John Oliver goes viral
A Last Week Tonight show, presented by John Oliver which is about MLMs and spends a lot of time on Herbalife, is going viral. The YouTube video racked up 6.3 million views and one that’s subtitled in Spanish (the Spanish-speaking community is an important demographic to Herbalife) racked up as much as 1.6 million views.
If you read the Wall Street Journal or GuruFocus you are probably aware there are people who question the ethics of Herbalife’s business model. However, and this is complete speculation on my part, they aren’t too interested in the business opportunity Herbalife offers peddling high-priced nutritional shakes. When the legitimacy of the business opportunity offered is questioned in more mainstream media, that has a much better chance of actually spreading across the company’s target demographic. It isn’t as in depth as Ackman’s infamous presentation, but that one reached something like 50,000 people (maybe a few more by now), and they were likely to be mostly investors.
FTC measures take effect May 2017
We aren’t quite there yet but the 31-page settlement agreement between the FTC and Herbalife will take effect in the first half of 2017. It is hard to imagine it will not affect the level of sales and profits Herbalife has demonstrated in the past, as it has important implications for the marketing strategies that can be used by distributors.
CEO Michael Johnson stepping down
Coincidentally, the 13-year CEO Michael Johnson will end his tenure in June 2017 right after these measures take effect. It is not a good sign when a CEO decides to quit while heading a company in turmoil. It is often followed by the new CEO putting out the dirty laundry on the first earnings call so that will be one to watch.
Ackman pointed out on the Pershing call that Herbalife’s business is reliant on a confidence game. Its top distributors (who put in a lot of work to keep their downlines going) need to believe the company is a reliable and stable partner. The long-time CEO quitting along with the business model being upended is not inspiring confidence.
In addition Ackman argues it is a bad sign the company hired an insider (base pay $1 million) instead of an outside superstar CEO.
Betting on Zero
Betting on Zero is now mostly going around film festivals where predominantly well educated people watch artsy films. It’s not a positive for Herbalife, but as long as sport superstars sign sponsorship agreements with the company it can probably offset the negative publicity. However Gunpowder Sky Distribution has bought the rights to distribute the documentary to theaters and plans to start doing so in early 2017. I haven’t watched the movie but judging from the trailer there could be some mass market appeal:
On a statistical basis Herbalife is fairly appealing. It trades at a forward Price-earnings (P/E) of 10x based on analyst estimates and at 10x EV/EBITDA. However, if Ackman is right about the above catalysts, revenue and profit could fall off quickly, makeing it important to do your qualitative work with this particular investment.
So far, I’ve never bet on either side (long or short) but in the past four years it hasn’t looked better for Ackman in the Herbalife vs. Ackman showdown. It will be interesting to see how it all shakes out.
Disclosure:Ă‚ No position.
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