Herbalife Ltd. (HLF)

Joel Greenblatt Pick

Value play

Negatives: Management self compensates heavily while owning few shares. Pyramid like structure with little to prevent copycatting in their new marketing target -- China. Supporters of LA Galaxy, another fad-based product.

Strengths: Strong demand for herbal remedies and Muti-Killing based products globally. Average IQ declining globally.

The growth potential in China is enormous. They are starting negotiations with Chinese government and if all goes well this stock could easily double in next 2 years adn triple if US economy comes bask faster and stronger

Can't get enough Utah based multi-level-marketing stocks in my portfolio. Pyramid style, recognize.

self health care

mfi pick 2

MFI following, all have negative Fool ratios but impressive 3 month gains

The analysis presented is based on a current price of $15.73.

Except for 2004, the EPS has been growing since 2003 (the starting point for the data). Over that period, the compounded annual growth (CAGR) has been 37%. The return on equity has exceeded 40% for the last four years, and the free cash flow has been positive and generally increasing since 2003.

Before I look at the valuations, I look at three indicators of financial safety. For this stock, all three are quite good. The Altman Z is 3.9; below 1.8 is risky, above 3 is the safe range. The Piotroski F is 7; 2 or below indicates caution, while 8 or 9 indicates that the stock is expected to rise within the next year. The Sloan accrual is -4.62; 5 or higher is high risk, while -5 or lower is excellent.

I use more than one valuation method to gauge intrinsic value; all provide a substantial margin of safety (MOS). The first three are standards in the valuation literature. The estimate based on Graham’s formula was $99 (84% MOS). The Earnings Power Value (value of the firm) was estimated, on a per share bases, to be $75 (79% MOS). The Discounted Cash Flow estimate valued the stock at $68 (77% MOS).

The last two were based on a spreadsheet found on the AAII website; these are designed to mimic Buffett’s valuation methodology. One is based on projecting EPS growth 10 years into the future based on past EPS growth; I discount the resulting valuation to reflect the price at which the stock will realize a compounded earnings (including dividends when applicable) return of 15%. Based on this method the target purchase needs to be below $22, and at the current price there is a 28% MOS.

The second is based on estimating EPS growth through the sustainable growth rate. The per-share projected book value is estimated by taking the previous year’s book value, adding EPS and subtracting dividends (when applicable). The projected EPS is estimated by multiplying the projected book value by the average Return on Equity, and the projected dividend is estimated by multiplying the projected EPS by the average payout ratio. I then discount the resulting valuation to reflect the price at which the stock will realize a compounded earnings return of 15%. Based on this method the target purchase needs to be below $114, and at the current price there is a 86% MOS.

To ascertain that the price is attractive to me, I take one more thing into consideration. At the current price, would I expect an immediate 15% return on my investment based on earnings and dividends? In this, the EPS represents about 21% of the share price by itself, so the 5.1% dividend yield is gravy.

Based on fundamentals, indicators of safety, and valuation, HLF rates to be a good investment.

Company has tremendous growth potential since the products are available worldwide. As a distributor of this company for 7 yrs now I have belief it will go up. Even in this bad market conditions it held a good price.

The company has guided to $3.00 for 2009, what I view as an easy to clear hurdle. The cost structure is highly variable which should allow the company to adjust fairly rapidly to changing economics. Currency headwinds are tough with foreign sales from 66 countries representing 80% of sales. Costs are primarily US based so periods of US dollar strength can be problematic. Nevertheless, the company generates 80% gross margins and 30% ROIC as well as significant free cash flow. The company has ample liquidity of about $150 million plus lines of credit which do not expire until 2012. There is $329 M in debt.

17 straight quarters of double digit growth. Should continue. Possible beneficiary of ecomonic slowdown.

so long fraud discovery institute, hello good days

Pyramid Scheme! Here are 8 pages worth reading: http://www.frauddiscovery.net/Herbalife/WallStreetFooled.pdf

Here's an excerpt: "Herbalife presents a glowing picture of new sales and expansion opportunity. In fact, the company is dependent upon continuous expansion into new territory not just for growth but survival. Yet, already, Herbalife expansion has reached more than 80% of the world’s population. After more than 20 years in the USA, Herbalife has more sales in Mexico than in its native and headquarter nation. And now Mexico is waning. Germany, the largest country in Europe, is dropping steeply. Brazil, the largest market in South America, is in decline.

Herbalife needs more territory because, as will be shown, it has no repeat customers! It is strip mining each new area it enters. 80% of all its distributors quit the scheme forever after less than one year. New replacements are Herbalife’s absolute mandate. Inevitably, new territory must be found. There is no sustainable business to build upon, only a continuously-told story about “unlimited income” to hype.

As everyone knows, a pyramid scheme pays earlier recruits with money from later ones and therefore must inevitably reach saturation. Eventually the vast majority of those at the bottom – last ones in – cannot find enough new recruits to recoup their investments. And, at all times, the bottom levels constitute the vast majority of the total. This is why pyramid schemes are defined as “inherent frauds.” By design, they harm and they must deceive.

What is commonly not understood, however, is that reaching this saturation point does not necessarily end the scheme. In fact, the pyramid scheme itself can continue even as the bottom level recruits are financially ruined. This is done by continuously replacing them! The market for the recruits is saturated but the market of recruits is not..."

Wtih Micahael O. Johnson as CEO, Herbalife's growth is soon follow that of Walt Disney's

4-star S&P pick trading near its 52-week low. S&P thinks this is undervalued by quite a lot, and has a 12 month price target of $51.

This pick is also testing out a theory from my favorite stock picking Bull, Ken Fisher: http://www.financial-planning.com/asset/article/528151/learning-love-debt.html

In the above article, Fisher argues that debt isn't necessarily a bad thing, especially if it's used to efficiently fund growth. He argues that on macro level (gov't spending), periods with increasing debt are always followed by strong periods of gains in the stock market.

I'm testing his theory out on a micro level, by picking this stock which has a fairly high level of debt. HOWEVER, the Return on Assets and Retrun on Equity are stellar for this company, indicating that perhaps the borrowing is very justified.

Conclusion - if Fisher's theory is correct on a micro level as well, this baby should beat earnings estimates and attract investor attention over the next few years.

Final note: I don't care for their products or marketing one bit. I also hate betting against top Fools like Specbear and others. This is mostly academic speculation, where I get to test a guru theory and S&P's accuracy in one pick.

Co annouced 17th consequtive qtr of increased earnings and in this qtr it was on the back of improving margins. The Co reported 80-percent of total sales are international with improving sales in China and South America.

The Co is becoming more mature and forward growth is now forecast at 15-percent per year for the enxt five years. Management is target total sales at $5 billion from current sales of more than $2 bilion.

Finally, the Co annouced testing conducted at a leading independent laboratory has confirmed that Herbalife products do not contain levels of lead that would require labeling under California Proposition 65 disclosure requirement. The company added to its ongoing compliance program by conducting extensive retesting of multiple product batches at the prestigious independent laboratories Covance (for U.S.) and Eurofins (for EU) before responding to recent allegations. Testing evidence suggests that there was never any health or safety issue with Herbalife products. Apparently misleading information released by a group that calls itself an independent fraud-discovery organization led to sensational media and online news coverage. The group’s founder Barry Minkow has evidently admitted to profiting from “puts” on Herbalife stock.

The end of the lead scare and 15-percent EPS growth suggest that the market has over reacted and profits are on the horizon. The management has a history of meeting or beating revenue and earnings forecasts.

Another stock bottom. Earnings were good.

Constantly growing at double digits, beating estimates. Huge market thanks to Junk Food companies.