D.A. Davidson’s Timothy Ramey loved Herbalife in 2013, and was very clearly vindicated. In a recent article, he wonders if it’s a good idea to double-down on the company. Below, Ramey explains he sees even more upside for Herbalife in 2014, mapping out several catalysts for big growth.
Is it wise to repeat a “best idea”?
“Herbalife Ltd. (NYSE:HLF) was our “single-best-idea” for 2013 and the shares performed well, up 139%. Ironically, it was not our best idea, which was NUS, up 273%. But in 2013 we considered repeating Constellation Brands (STZ*-$70.38-BUY), which was our Best Idea for 2012. It wouldn’t have been shabby, up 99% this year on top of a 72% gain in 2012. So perhaps it’s not bad to repeat. As we survey our coverage, nothing looks as compelling for 2014 as Herbalife Ltd. (NYSE:HLF).
The facts of 2013 align with our view of Herbalife, and refute the bear case.
The company has had two big-four audits, both with a clean bill of health. The second, by PwC, with particular attention and inquiry paid to allegations made by a now-infamous short seller. Perversely, the inquisition Herbalife has endured for the past year has made the company better with a few “raising the bar” policy tweaks on product returns and “lead generation.” But it is the depth of the research by both longs and shorts that has clearly vindicated the Herbalife MLM model, in our opinion.
We think it will be hard for Herbalife Ltd. (NYSE:HLF) and its MLM peers to trade at their historic discounts. The questions have been asked and answered. It’s not in our current target, but we think it would be very easy and logical to make a case that the stellar growth of Herbalife Ltd. (NYSE:HLF) could garner a hyper-growth multiple of 25x-30x EPS.
Growth may accelerate – focus on China
We note that China had a breakout quarter in the 3Q with sales reps up 25% and revenue up 77% on 71% volume growth. China has been a wild story. The entrepreneurial spirit is incredibly alive there. All three MLMs in our coverage have experience hyper-growth in China, led by Nu Skin (NUS*-$138.22-BUY). NUS quadrupled its sales in China over a
three-year period and now China is over $1 billion in revenues and Greater China will be $1.4 billion – 36% of sales. Herbalife Ltd. (NYSE:HLF) is further down on the growth curve – but it is the same growth curve, in our opinion.
China will become Herbalife’s #2 country, likely in the 4Q13, and looks like it could surpass the U.S. to become the #1 country in 2015. Notable too, the model the MLMs operate in China is direct selling, not MLM. Of course, the growth in Herbalife Ltd. (NYSE:HLF) is broad-based with many other markets growing in double digits.
Valuation is compelling
Despite the hurdles Herbalife has overcome, the valuation remains modest, particularly versus its powerful growth in revenues and EPS. Three-year growth rates (ending 2013) are 20.3% on revenue and 29.4% on EPS. The company has beat and raised EPS for 19 quarters in a row. Yet the shares are selling at 14.9x earnings and 9.3x EV/EBITDA. True that is twice
where they were a year ago, but two years ago they were at 16x EPS and 10x EV/EBITDA. If “multilevel” were to be fully vindicated as an operating strategy, why wouldn’t HLF deserve to sell at 25x EPS? It has impressive margins, huge cash flow, which it has used to benefit shareholders with aggressive share repurchase and dividend increases, and its revenue growth beats anything else we cover. Our price target is $115, 20x 2014 EPS; our long-term target is $150.
Possible 2014 catalysts
We continue to think that the situation is ripe for a catalyst – perhaps a leveraged share repurchase, perhaps a leveraged buyout. Several noted investors including Carl Icahn and William Stiritz have “activist” positions and are likely to pressure Herbalife Ltd. (NYSE:HLF) to use its zero-debt-net-ofcash balance sheet to leverage returns to shareholders. The company has held its dividend constant for eight quarters after a 50% boost in the 1Q12.”
