North America

Earnings Preview: Herbalife Ltd. Q2 2017 (HLF)

By: Craig Bowles

Overview

Herbalife Ltd. (HLF) is slated to report 2Q 2017 earnings after the close of trading on Tuesday, August 1st. Results are typically released at approximately 4:05 p.m. ET followed by a conference call at 5:30 p.m. available through Herbalife Investor Relations.  Herbalife is a multi-level marketing company that develops markets and sells nutrition, weight management and skin-care products globally.

Outliers & Strategy

Key measures:

  • Adjusted Earnings Per Share (EPS): Company guidance is for $0.85 to $1.05. The current Street estimate is $1.12 (range $1.09 to $1.15). (Source: Yahoo! Finance) Consensus was $1.08 three months ago.
  • Revenues: Company guidance is for -4.5% to -0.5%. Analysts expect a decrease of 3.1% y/y to $1.16 bln.
  • Adjusted Earnings Per Share (EPS) Guidance for 3Q2017: The current Street estimate is $1.22 (range $1.15 to $1.29).
  • Adjusted Earnings Per Share (EPS) Guidance for FY2017: Company guidance is $4.05 to $4.45. The Street estimate is $4.62.
  • Herbalife’s Price/Earnings of 24.0 compares to a 5-year average of 13.9; Price/Sales of 1.3 vs a 5-year average of 1.3, Price/Cash Flow of 14.9 vs a 5yr average of 8.1.
  • Analysts view Herbalife with 2 Buy, 2 Hold, and 0 Sell ratings. (source: MarketBeat.com)
  • Insiders sold 644,679 shares in the past three months but have bought a net 4,944,868 shares in the past year. (source: NASDAQ.com) The company approved a $1.5 billion stock buyback in February 2017.
  • Herbalife results could impact other personal product companies, such as GNC Holdings (GNC), USANA Health Sciences (USNA), Nu Skin Enterprises (NUS) and Weight Watchers (WTW).
  • Herbalife has a 1-day average price change on earnings of 9.18%. Options are pricing in an implied move of 9.02% off earnings.

Recent News

  • 07/14: Activity on the Herbalife membership sites suggests a YoY decline in new members in excess of 30%. Google Trends implies a decline of 12% or more in North American VP’s in Q2, according to a post on SeekingAlpha.com.
  • 06/22: Herbalife was reportedly “raided” by the FDA in India, according to a post on nagpurtoday.in.
  • 06/05: Tigress Financial reiterated a Buy rating on Herbalife but acknowledges adoption of FTC mandated sales tracking and reporting requirements will be a near-term issue as integration and adoption takes place, according to a post on Barron’s.com.
  • 06/05: Bill Ackman of Pershing Square issued a statement on Herbalife. Questions guidance raise followed by options selling and then guidance reduction. Herbalife has yet to disclose, let alone explain the reasons behind departures following FTC settlement, according to a post on StreetInsider.com.
  • 06/01: Herbalife named strategist Richard Goudis as CEO. Michael O. Johnson will now assume the position of Executive Chairman.
  • 05/26: Herbalife’s China Chief is reportedly resigning, according to a post on StreetInsider.com.

Technical Review

Herbalife shares tested above $70 in 2012, 2013, almost in 2016, and now 2017. Anytime you see such multi-year consolidation, the breakout potential becomes magnified. It’s been such choppy consolidation that this is more than your basic “dead in the water” stock that has been simply forgotten. Hopefully it will become that before a breakout occurs. Analysts and traders show less interest each quarter, so that’s a good sign. Current balance is centered around $71. (Chart courtesy of StockCharts.com)

Summary

One year after Herbalife settled with the FTC and paid $200 million, the company appears to be doing well other than some executive reshuffling. One FTC rule is for 80% of sales to actual customers rather than distributors appears to not be a problem with that number reaching 90% in May. The recent declines of traffic on their site would seem to be a worry. Stock buybacks got the expected boost this year from financing that surprisingly was oversubscribed by nearly double. The company has grown revenue and earnings admirably despite the negative publicity and attacks. Insiders reversed their buying and sold shares over the past three months. Herbalife was private during 2002-2004, so you wonder if taking the company private again might be considered. The company has beaten analyst consensus by an average of 15c the last four quarters. Estimize consensus for an EPS of $1.13 on revenue of $1.150 bln compares to analyst consensus of $1.12 on revenue of $1.16 bln. Guidance will also be factored into the reaction following results.

 

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