Herbalife Nutrition Ltd. (HLF, Financial), a large stake in activist investor Carl Icahn (Trades, Portfolio)’s portfolio, has tumbled to near its lowest price since February 2018, erasing the gains he made after it shot up when Bill Ackman (Trades, Portfolio) ended his short against the company.
Icahn took a position in the multi-level marketer of nutrition products shortly after hedge fund manager Ackman announced a short bet in 2012 with a presentation calling the company a “pyramid scheme” and saying its price would collapse. After the company failed to go to zero as he predicted, Ackman announced on Feb. 25, 208, that he exited the position at a loss, sending the price up 6.3% in one day. A year later, its price had soared around 30%.
But starting around Feb. 1 this year, Herbalife stock began to tumble. By market close Monday, it had dropped 31.5% to $40.69, its lowest price since January 2018, erasing the gains it made since Ackman ended his short. With a 3.02% rise Tuesday, the stock traded around $41.91.
The plunge has diminished but not erased Icahn’s gains. The stock traded at an average price of $19 in the first quarter of 2013 when he bought 32.7 million shares. He purchased smaller parcels of additional shares over subsequent quarters, building the position to 45.7 million shares as the price increased, but has an average buy price around $29 based on GuruFocus estimates. He also sold almost 23% of the stake, or 10.5 million shares, to the company in a tender offer on May 25 at a price around $52 per share.
In all, GuruFocus estimates that as of Tuesday, Icahn’s gain on Herbalife stands somewhere around 47%.
As of second quarter-end, Icahn held about 35.2 million shares, for a 23.3% stake. The position represented about 7.74% of his long equity portfolio.
Accelerating the decline in Herbalife’s stock was the market’s response to its first-quarter results and troubles in China. The stock declined 21% from the day they were released, May 2, to the end of the month.
For the first quarter, Herbalife reported $1.17 billion in net sales, down 0.4% from a year earlier. Results were negatively affected by a 29.1% decline in sales in China and 20.6% decline in South and Central America. Sales improved across its four other segments.
First-quarter adjusted earnings were 66 cents per share, one cent short of analyst estimates, compared to 54 cents a year earlier.
The company reported that China’s government had implemented a 100-day review of the health products industry, which ended in mid-April and reduced the number of meetings services providers could conduct. Local governments had begun approving meetings again in May, the company said.
But the interference will continue to weigh on the company’s sales and earnings in the near future. For full-year 2019, Herbalife revised its sales guidance to a range between a 1% decline and 5% increase. It previously forecasted net sales growth in the range of 4-8%. It lowered its expectations for diluted earnings per share to between $2.19 and $2.64, from its previous guidance of between $2.34 and $2.74.
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