Five years after their television brawl, Carl Icahn (Trades, Portfolio) still has over 7% of his portfolio invested in the nutrition company, and Bill Ackman (Trades, Portfolio) has sold out, doing so early in the year despite creating some very compelling content around why the company is worth significantly less. This was yet another reminder that company worth and market value are not always connected.
Herbalife (HLF, Financial) sells weight-management, nutritional supplement, energy, sports and fitness, and personal care products through a network of millions in more than 90 countries. At corporate, it has about 8,000 employees to support the "business opportunity," and that's exactly what they call it.
Whether you believe in the MLM model or not, Herbalife has done an incredible job building its brand. The company has created over 190 sponsorships with leading athletes around the world, names like football star Cristiano Ronaldo, triathlete Heather Jackson, the LA Galaxy, and cricket start Virat Kohli.
It has used the brand power to build a big business. In the last 23 months, Herbalife generated $184 million in net profit on $4.8 billion in sales. And, with free cash flow of $612 million and capex at just $83 million, the business model works. Say what you will about the customers (e.g., distributors) of Herbalife, the company continues to grow, posting sales increase of 12% in the second quarter, spurred by its biggest market, North America, as new preferred members rose year-over-year. The company also saw numbers rise in China and Mexico, while South and Central America (especially Brazil) were weak due to currency exchange volatility.
But again, the bottom line is that Herbalife has settled with the Federal Trade Commission, a $200 million payment to nearly 350,000 victims, and its restructuring of sales methods and tools have, so far, been successful. In 2019, the company is looking to earn north of $3 per share, which is exactly the reason to get out now. Even with solid results expected from Herbalife, the company is priced at higher valuations than when Bill Ackman (Trades, Portfolio) gave his first presentation on it.
In that time, growth has slowed, earnings have decreased and book value has turned negative. Even with management raising the guidance for per-share earnings, paying 18x earnings and almost 2x sales is not prudent. Based on its fie-year average, Herbalife prices in at 14x earnings and 1.2x sales. That would put the stock in the $38 to $42 range, and there's no reason for investors to value the shares at higher multiples more today than five years ago.
That said, short-sellers may make some cash short-term, but Herbalife is likely to continue upward growth trajectories. In the last decade, it doubled annual revenue turnover and booked more than $3.2 billion in net profit. The company is going to stick around; however, investors should not pay up for its stock.
Disclosure: I am not long/short Herbalife.
