Will Herbalife Stock Continue to Rise?

Herbalife (HLF) stock has risen substantially on a YTD (year-to-date) basis due to its strong 1Q17 results and increased stake by activist investor Carl Icahn. Several other hedge funds and institutional investors also boosted their stake in the company, which lifted the stock price higher.

On a YTD basis, the company’s stock has risen ~54% as of June 2, 2017. Meanwhile, the stock has gained ~19% since it reported strong 1Q17 results on May 4.

The above graph shows that Herbalife stock has outperformed its major rivals and the broader index in terms of stock price appreciation. Since the beginning of the year, the SPDR S&P 500 ETF (SPY) has risen ~9%. Meanwhile, peers Nu Skin (NUS) and Usana Health Sciences (USNA) have generated returns of 19% and 7%, respectively, on a YTD basis.

Herbalife raised its profitability outlook for 2Q17 and lowered its sales outlook, which reflects soft trends in the US and Mexico. During its 1Q17 conference call, Herbalife stated that it expects 2Q17 to remain challenging due to tough comparables. China’s business volume growth is projected to slow down as members bought more products in March due to the planned price increase on April 1, which isn’t going to be repeated in the current quarter.

If we look at the company’s performance in the last quarter, its bottom line was mainly boosted by the lower effective tax rate as its top line fell. Besides, cost savings stemming from self-manufacturing and strategic sourcing combined with price increases supplemented its profitability growth.

However, with sales forecast to fall more compared to its earlier guidance, profitability growth remains a big question mark. Meanwhile, softness in North America, China, and Mexico poses more challenges—they account for 50% of total sales.