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What Will Result from Herbalife’s Discussions with the FTC?

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Price movement of Herbalife

Herbalife (HLF) has a market cap of $5.1 billion. HLF rose by 20.5% to close at $55.15 per share on February 26, 2016. The price movement on a weekly, monthly, and year-to-date (or YTD) basis is 15.5%, 22.0%, and 2.9%, respectively.

Currently, HLF is trading 20.2% above its 20-day moving average, 12.2% above its 50-day moving average, and 3.7% above its 200-day moving average.

The iShares Russell Midcap ETF (IWR) invests 0.07% of its holdings in Herbalife. The ETF tracks a market-cap-weighted index of the 800 smallest companies in the Russell 1000. The YTD price movement of IWR was -6.3% as of February 25, 2016.

The market caps of Herbalife’s competitors are as follows:

  • GNC Holdings (GNC): $2.1 billion
  • Nu Skin Enterprises (NUS): $1.7 billion
  • Archer-Daniels-Midland (ADM): $20.7 billion
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Herbalife’s discussions with the FTC

Herbalife suggested that it could be close to a resolution of its probe with the Federal Trade Commission (or FTC). Earlier, the FTC launched an investigation into the health supplements company after hedge fund billionaire Bill Ackman took out a $1 billion short position and claimed the company was akin to a pyramid scheme and that it was preying on poor people. The company has denied these allegations, leading to a legal and public opinion battle.

Performance of Herbalife in recent 4Q15 and 2015

Herbalife reported fiscal 4Q15 net sales of $1,098.4 million, a fall of 3.1% compared to net sales of $1,133.6 million in fiscal 4Q14. Sales from North America, Mexico, South and Central America, EMEA, and Asia-Pacific fell by 0.68%, 14.3%, 21.2%, 3.9%, and 5.5%, respectively. Sales in China rose by 24.4% in fiscal 4Q15 compared to fiscal 4Q14.

Its net income and EPS (earnings per share) fell to $84.5 million and $0.98, respectively, in fiscal 4Q15, compared to $103.3 million and $1.21, respectively, in fiscal 4Q14.

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Fiscal 2015 results

In fiscal 2015, HLF reported net sales of $4,469.0 million, a fall of 9.9% YoY (year-over-year). Its net income and EPS rose to $339.1 million and $3.97, respectively, in fiscal 2015, compared to $308.7 million and $3.40, respectively, in fiscal 2014.

Meanwhile, its cash and cash equivalents rose by 37.9% and inventories fell by 12.1% in fiscal 2015. Its current ratio fell to 1.5x in fiscal 2015 compared to 1.6x in fiscal 2014.

The PE (price-to-earnings) and PS (price-to-sales) ratios of Herbalife are 13.9x and 1.1x, respectively, as of February 26, 2016.

Projections

The company has made the following projections for fiscal 1Q16:

  • volume point growth in the range of -1.5%–1.5%
  • net sales growth in the range of -6.0% to -3.0%
  • adjusted diluted EPS in the range of $0.97–$1.07
  • effective tax rate in the range of 28.0%–30.0%
  • currency adjusted EPS in the range of $1.24–$1.34

The company has made the following projections for fiscal 2016:

  • volume point growth in the range of 1.5%–4.5%
  • net sales growth in the range of -0.5%–2.5%
  • adjusted diluted EPS in the range of $4.05–$4.50
  • effective tax rate in the range of 28.0%–30.0%
  • currency adjusted EPS in the range of $4.85–$5.30
  • capital expenditure in the range of $105.0 million–$135.0 million

In the next part, we’ll look at Ecolab.

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