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Wall Street: Herbalife Not A Pyramid Scheme, Trends Turning Around

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Wall Street: Herbalife Not A Pyramid Scheme, Trends Turning Around
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Herbalife Ltd. (NYSE: HLF) is scheduled to report its second quarter results after market close on Wednesday. The Estimize community (based on 11 estimates) is expecting the company to earn $1.21 per share on revenue of $1.156 billion, while the Wall Street consensus is looking for the company to earn $1.13 per share on revenue of $1.148 billion.

Pivotal Research: Signs Of Bottoming

Timothy Ramey of Pivotal Research Group commented in a note on July 24 that Herbalife is expected to earn $1.17 per share in the quarter on sales of $1.152 billion, marking an 11.8 percent drop from the same quarter a year ago due to a negative mix and unfavorable foreign exchange rates. The analyst is also projecting an EBIT margin of 13.3 percent, which, if correct, will be the worst margin in many years.

However, despite a "grim" EBIT margin, the analyst stated that the three days he spent at the Herbalife Extravaganza (July 10–12) "reinforced" his view that Herbalife members are indeed seeing a rebound in the business and improved volume numbers.

Related Link: Pivotal Research Analyst: Chance Of FTC Shutting Herbalife Down Is "Next To Zero"

"Extravaganza is not a time to meet with management; it's a time to meet with distributors both large (a Chairman's Club member and a Founder's Circle member) and small," Ramey wrote. "There is palpable enthusiasm about a positive turn in the business. We suspect that will be communicated on the quarterly call and a return to modest growth in the 4Q is in our numbers."

Shares were maintained with a Buy rating and unchanged $90 price target.

Barclays: Takeaways From Q1

Meredith Adler of Barclays commented in a note in early May that changes Herbalife has made to its business are "gaining traction."

As an example, Adler pointed out that Herbalife made first order limits of 1,200 volume points mandatory. In the first quarter, 67 percent of the members built sufficient volume points (using the three to 12 month cumulative period versus one to two months) as opposed to only 38 percent a year ago. In fact, in certain markets like the United States and Brazil, the percentage was higher, hovering in the 86 to 87 percent range.

Adler noted that Herbalife's first-quarter volume points were down 4 percent, and the company is calling for a "particularly sharp" decline in the second quarter of 4.5 percent to 7.5 percent. However, the analyst suggested that if Herbalife's second-quarter volume prints are within the guided range, then a full-year guidance (1 percent to 4 percent decline) still implies a "meaningful recovery" in the bottom half of the year, with the fourth quarter expected to be "markedly better" than the third.

Finally, Adler suggested that Herbalife's "serious debt overhang" has been "amended away," reducing the risk profile of owning shares. The company also obtained the right to buy back its stock, although its debt providers want the company to reduce its debt load dollar for dollar with any stock repurchase. As such, the analyst argued that the company is unlikely to buy back its stock right now, though "continuing positive results" might make management "more comfortable" about doing so later on in the year.

Shares were maintained with an Overweight rating and unchanged $64 price target.

Related Link: American Red Cross And Herbalife Partner To Encourage Blood Donations

Sterne Agee CRT: Trends Turning, But Wait For Better Entry Point

April Scee of Sterne Agee CRT initiated coverage of Herbalife with a Neutral rating and no assigned price target on July 20.

According to Scee's analysis, Herbalife is not a pyramid scheme and has put many protections in place to make its business model superior to other MLMs and bricks-and-mortar peers. However, the analyst cautioned that even though there is no reason for the FTC to fine the company, there is the possibility that the FTC could change its rules.

Scee continued that Herbalife offers a "solution" to rising obesity problems. The company's Formula 1 (and other products) could offer consumers "one of the most effective tools" available for consumers struggling with their weight. In addition, the company's financial model "benchmarks well," with high margins, low capital intensity and good growth relative to its peers.

With that said, Scee suggested that "trends are starting to shift" to Herbalife's benefit, giving the analyst "confidence" that the "worst is behind us." However, given the recent stock's performance, investors may be prudent waiting for a better entry point.

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Latest Ratings for HLF

DateFirmActionFromTo
Apr 2016BarclaysTerminatesOverweightOverweight
Aug 2015Pivotal ResearchMaintainsBuy
May 2015Canaccord GenuityMaintainsBuy

View More Analyst Ratings for HLF
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