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JohnCLeven (80.86)

Opinions on Ackman vs Herbalife?

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December 20, 2012 – Comments (13) | RELATED TICKERS: HLF

I find this Ackman/Herbalife story very interesting. 

I talked to an aquaintence who has been working at Herbalife on the side for over 20 years and he says Ackman's totally wrong and dosen't understand MLM marketing, blah blah. He didn't exactly convince me.

Ackman, who i've followed for a while, shocks me bc this is only the 2nd time he's ever been short. He also said he is giving the money he makes to charity. Also his conviction is significant.

“We welcome their suing us. If they sue us, we get access to inside information on Herbalife that we can prove that we are telling the truth. For me to say a company is a pyramid scheme is something I do not do lightly. This is a company we started analyzing a year and a half ago, this is a company that we have done an enormous amount of work. We will make our work available…I believe that it is a certainty that this company is a pyramid scheme. And I would not say that if I did not believe that to 100% confidence level because I understand the implications of saying publicly that a company is a pyramid scheme if it’s not a pyramid scheme. This is what I believe based on very careful and thorough analysis of every fact we’ve found. There is not a fact we have learned that is inconsistent with this company being a pyramid scheme…This is the highest conviction I have ever had about any investment I have ever made, full stop.” - Ackman

An analyst at the firm, Shane Dinneen, took the audience through the details, showing charts of the company’s sales structure. Levels in the structure have names like “millionaire team” and “founder’s circle.”

Mr. Dinneen zeroed in on the way Herbalife reports sales. The suggested retail price that the company uses is not the price at which products are actually sold, Mr. Dinneen said. That suggested price is an “artificial, inflated number,” Mr. Dinneen said, while the actual price can be significantly lower.

If Ackman is wrong, however, this would be an EPIC buying oppurtunity to buy a growth company at basement prices. I will be looking for the three hr presentation he gave today, and post it here if I can.

I'd love to hear what you guys have to say about Ackman/Herbalife. Is it a pyramid? Is it a buying oppurtunity? Is it too tough to call?

Thanks,

-John

13 Comments – Post Your Own

#1) On December 20, 2012 at 5:43 PM, Mega (99.96) wrote:

Like a tobacco company, I would never invest in a MLM because I don't like the social effects, and there are plenty of other stocks out there.

But HLF looks too cheap to short. I suspect there are worse MLM schemes, for example NUS and BTH.

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#2) On December 20, 2012 at 7:01 PM, Mega (99.96) wrote:

It's kind of like Ackman just found out that MLMs are pyramid schemes. I mean isn't it obvious that these are unethical businesses, that regulators should be looking at but probably aren't?

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#3) On December 20, 2012 at 8:13 PM, JohnCLeven (80.86) wrote:

MegaShort, comment #2 was my initial reaction as well.

If you (or anyone who may stumble upon this blog) are interested, here is Ackman's 343 page slideshow presentation:

http://www.businessinsider.com/bill-ackmans-herbalife-presentation-2012-12#-1

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#4) On December 20, 2012 at 10:16 PM, JohnCLeven (80.86) wrote:

After going through the 343 slide presentation, here are my favorite excerpts.

- Global retail sales of HLF’s formula 1 powder are greater than that of Listerine and Clorox, and very close to Crest and Oreo, yet few people have heard of Herbalife Formula 1.

- Herbalife sells six times more powder than Ensure, SlimFast, and GNC’s Lean Shake – combined – at 2 to 3x the price, in a commodity industry, with almost no advertising of the products. Also, R&D is under 2 million.

- Ackman's main claim is that HLF makes most its money by forcing its distributers (victims?) to buy the product, knowing they won't be able to actually sell it.

-Instead, distributers are incentivized to recruit new distributors, not really sell much of the product itself.

-98% of distributors make less than $5659 per yr and 93% actually make zero or lose money. (60% of business is in Latin America, so maybe that isn't quite as bad as it seems)

- A Belgian court already ruled Herbalife as pyramid scheme.

My main takeaway: HLF is a pretty rough MLM, as many of them are. However, the big key here is that, by definition, to be a pyramid scheme, the company must make more money recruiting than selling to customers. That is still to be determined.

Investing wise: Even in a best case senario for HLF, they will probably still be forced to change the way they're currently doing business, which will likely hurt profitability. Worse case, heavy lawsuits and end of HLF as we know it.

Conclusion: Looks like it probably fits the 50% definition of a ponzi scheme, assuming Ackman's data is anywhere near correct. Going forward the company will have serious legal issues, as well as changes to business model, both of which are not good for profitability.

Despite my CAPs green thumb after Einhorns comments, I am not interested in buying HLF in real life, at any price, at this time. I will probably close my HLF green thumb in the negative (something i've never done in CAPs before, and had hoped to never do.)

Whew, that was alot!

 

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#5) On December 21, 2012 at 12:36 AM, awallejr (83.96) wrote:

Simple.  When in doubt pass.  Plenty of other stocks to invest in.

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#6) On December 21, 2012 at 10:03 AM, Schmacko (66.06) wrote:

MLMs are unethical companies.  I would never invest in one, solely on principle.  The company also makes overpriced products of dubious quality. 

Barron's article says Ackman's company makes up something like 80% of the current short interest and the float is small enough that it might be hard for other investors to borrow shares to short. 

http://blogs.barrons.com/focusonfunds/2012/12/21/ackman-isnt-just-short-herbalife-he-is-the-short/?mod=yahoobarrons

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#7) On December 21, 2012 at 11:21 AM, Mega (99.96) wrote:

After reading his epic presentation, I have to agree that HLF is a terrible company.

But, I still doubt the FTC will take action against it for being a pyramid scheme, unless the SEC takes action for accounting fraud. The argument really rests on the false accounting.

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#8) On December 21, 2012 at 12:10 PM, JohnCLeven (80.86) wrote:

@awallejr

Wise words. I should hang that above my desk.

@Schamcko

Thanks for the link! Good info.

@MegaShort

HLF was already ruled to be a pyramid scheme in Belgian courts. I think the basic rule in the U.S. is you need to make more money from retail than recruiting, and it's doubtful that Herbalife does that. Now, like any good MLM company, they probably have a very good legal department whose sole job is making sure everything they do just barely meets the legal standards. I'm looking forward to seeing how this case turns out.

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#9) On December 21, 2012 at 1:06 PM, TMFDeej (99.41) wrote:

Great link to the entire presentation, John.  Thanks for sharing.

Deej

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#10) On December 21, 2012 at 1:26 PM, Mega (99.96) wrote:

"I think the basic rule in the U.S. is you need to make more money from retail than recruiting, and it's doubtful that Herbalife does that."

Agreed, but the SEC allows them to report exactly that.

My thinking is that the people at the FTC looking at pyramid schemes are lawyers, not corporate finance experts, and they won't make determinations on public company accounting on their own.

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#11) On December 21, 2012 at 1:37 PM, Schmacko (66.06) wrote:

slide #118

Question #1 from David Einhorn:

"First, how much of the sales that you'd make in terms of final sales are sold outside the network and how much are consumed within the distributor base?"

Herbalife's published answer:

We don't track this number and don't believe it is relevant to the business or investors.

This made me laugh.

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#12) On December 22, 2012 at 1:52 PM, MagicDiligence (< 20) wrote:

Ackman could run the table and...

a) Get the FTC to take up his case in the first place.

b) Find wrong-doings within the business model.

c) Get the FTC to enact punitive damages instead of a fine and forced changes to compensation / return policies.

All that can happen, and still...

... 80% of HLF's revenues will be intact because they are outside the U.S. and the company is domiciled in the Caymans.

Very curious bet. 

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#13) On January 09, 2013 at 10:26 PM, JohnCLeven (80.86) wrote:

Loeb now with an 8% stake.

Now it's getting really entertaining!

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