Is Herbalife (HLF) Poised to Beat Earnings Estimates?

Herbalife Ltd HLF is set to report second quarter 2014 results today after the market closes. Last quarter, it posted an impressive earnings surprise of 16.28%. Let's see how things are shaping up for this announcement.

Factors to Consider this Quarter

This weight management and nutritional products company has been delivering excellent earnings results and has outpaced the Zacks Consensus Estimate in the last 21 quarters. Rising health consciousness among consumers worldwide has been driving the demand for Herbalife's products.

Last quarter, earnings were at the higher end of the company's guidance range and also increased 18% year over year on the back of double-digit growth in the top line. The company expects its second quarter adjusted earnings in the range of $1.51 to $1.55 per share, much higher than $1.41 per share earned in second quarter 2013, which we believe is due to growing demand of the company's products.

Other than impressive earnings results, Herbalife's share prices have been on a roller coaster ride due to continuous accusations by activist investor William Bill Ackman, hedge fund manager of Pershing Square. Ackman has been accusing the company since Dec 2012 by calling it a pyramid scheme i.e. it employs deceptive marketing practices for improving business. Ackman believes that the nutrition clubs run by Herbalife's distributors focus on recruiting instead of selling products. (Read: Herbalife Faces Another Ackman Attack). Ackman's back-to-back allegations have prompted investigations by the Securities and Exchange Commission, Federal Trade Commission, FBI and at least two state attorneys general. But so far none has taken any action. Herbalife, on its part, has been denying the charges since 2012 and has full confidence in its business model.

Recently, Ackman reportedly stated that he had evidence that Herbalife is running a pyramid scheme business model. (Read: Herbalife Shares Tumble Ahead of Ackman Presentation). However, Herbalife's shareholders turned their backs to Ackman's statements and reiterated confidence in the company. (Read: Herbalife Shares Up 25% as Ackman's Accusations Fizzle Out).

The company's earnings have continued to increase despite numerous attacks on its multi-marketing model. We expect the trend to continue in the second quarter. Herbalife is not the only company, which employs sales representatives to sell its products. Other multi-level marketing companies like Nu Skin Enterprises Inc. NUS also follow the same distribution model.

Earnings Whispers?

Our proven model does not conclusively show that Herbalife is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: ESP for Herbalife is 0.00% as both the Most Accurate Estimate and the Zacks Consensus Estimate stand at $1.57 per share.

Zacks Rank #2 (Buy):Herbalife's Zacks Rank #2 when combined with an ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with Zacks Ranks #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Other retail stocks that have both a positive earnings ESP and a favorable Zacks Rank are:

Citi Trends Inc. CTRN, with Earnings ESP of +6.90% and a Zacks Rank #1 (Strong Buy).

Abercrombie & Fitch Co. ANF, with Earnings ESP of +27.27% and a Zacks Rank #3 (Hold).