2015 | 2016 | ||||||
Price: | 51.08 | EPS | 4.55 | 5.03 | |||
Shares Out. (in M): | 92 | P/E | 0 | 0 | |||
Market Cap (in $M): | 4,720 | P/FCF | 0 | 0 | |||
Net Debt (in $M): | 1,013 | EBIT | 0 | 0 | |||
TEV (in $M): | 5,733 | TEV/EBIT | 0 | 0 |
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Exhibit 3 | |||||||
Herbalife YOY, constant currency sales, major countries | |||||||
Q313 | Q413 | Q114 | Q214 | Q314 | Q414 | Q115 | |
North America | |||||||
US | 10.2% | 5.1% | 8.2% | 1.4% | -2.3% | -3.2% | 3.5% |
Mexico | 8.7% | 8.4% | 7.4% | 6.5% | 3.5% | -1.1% | -2.1% |
Brazil | 31.5% | 30.5% | 25.5% | -0.6% | -1.5% | -9.9% | -7.8% |
Europe | |||||||
Italy | 19.7% | 15.2% | 25.0% | 24.0% | 24.8% | 27.1% | 13.9% |
Russia | 31.2% | 23.9% | 39.0% | 43.3% | 21.0% | 23.5% | 35.1% |
Spain | 19.9% | 34.7% | 45.4% | 35.3% | 21.7% | 21.8% | 13.1% |
Asia | |||||||
South Korea | -0.2% | -10.2% | -11.4% | -3.5% | 0.3% | -20.2% | -25.3% |
Taiwan | -19.5% | -10.2% | -16.8% | -10.7% | 19.9% | -31.6% | 1.5% |
Malaysia | -18.8% | -28.9% | -42.9% | -33.8% | -38.4% | -40.7% | -21.8% |
India | 5.5% | 8.5% | 12.2% | 33.2% | 5.5% | 5.4% | 5.8% |
Indonesia | 60.6% | 22.5% | 13.0% | -0.6% | -14.6% | -4.9% | -17.4% |
China | 70.3% | 121.0% | 94.8% | 45.7% | 33.5% | 20.3% | 23.4% |
Total | 20.5% | 23.2% | 16.9% | 10.8% | 6.3% | 0.0% | 4.0% |
Source: Herbalife |
Exhibit 4 | |||||||||||||||||
Tupperware YOY, constant currency sales, major countries | |||||||||||||||||
Q313 | Q413 | Q114 | Q214 | Q314 | Q414 | Q115 | |||||||||||
North America | |||||||||||||||||
US/ Canada | 0.0% | -3.0% | -8.0% | -6.0% | 3.0% | 7.0% | 7.0% | ||||||||||
Mexico | 4.0% | 14.0% | 12.0% | -3.0% | 9.0% | -11.0% | 1.0% | ||||||||||
Brazil | 36.0% | 19.0% | 23.0% | 22.0% | 21.0% | 43.0% | 46.0% | ||||||||||
Europe & Africa | |||||||||||||||||
Germany | -20.0% | -14.0% | -3.0% | -29.0% | -6.0% | -5.0% | -11.0% | ||||||||||
France | -13.0% | 2.0% | -6.0% | 0.0% | 1.0% | -1.0% | -14.0% | ||||||||||
Turkey | 34.0% | 24.0% | 19.0% | 28.0% | 9.0% | 9.0% | -2.0% | ||||||||||
CIS | na | na | -18.0% | -38.0% | -14.0% | -3.0% | 1.0% | ||||||||||
South Africa | -11.0% | 28.0% | 13.0% | -3.0% | -19.0% | 0.0% | 17.0% | ||||||||||
Asia | |||||||||||||||||
China | 23.0% | 21.0% | 29.0% | 28.0% | 24.0% | 20.0% | 19.0% | ||||||||||
India | 3.0% | 1.0% | -14.0% | -9.0% | -15.0% | -8.0% | -5.0% | ||||||||||
Indonesia | 31.0% | 33.0% | 25.0% | 16.0% | 14.0% | 16.0% | -6.0% | ||||||||||
Malaysia/ Singapore | 10.0% | 17.0% | -4.0% | 8.0% | -7.0% | -4.0% | 6.0% | ||||||||||
Total | 6.0% | 5.0% | 7.0% | 3.0% | 4.0% | 6.0% | 3.0% | ||||||||||
Source: Tupperware |
Exhibit 5: | |||
YOY Growth - US Market | |||
Year | HLF | TUP | USNA |
1993 | 200.2% | 8.8% | na |
1994 | 19.5% | 1.5% | na |
1995 | 13.1% | -8.8% | na |
1996 | -16.2% | -13.2% | 107.7% |
1997 | 6.8% | -13.6% | 31.9% |
1998 | 22.0% | 5.8% | 18.4% |
1999 | 14.2% | -4.7% | -3.0% |
2000 | 8.9% | 13.2% | -6.4% |
2001 | -2.5% | 15.8% | -3.5% |
2002 | 9.9% | 5.0% | 5.9% |
2003 | -10.3% | -17.2% | 29.9% |
2004 | -8.0% | -15.3% | 25.9% |
2005 | 12.6% | -9.0% | 18.8% |
2006 | 18.8% | 0.7% | 18.7% |
2007 | 23.9% | 13.4% | 6.4% |
2008 | 14.0% | 4.7% | -5.0% |
2009 | 7.4% | -3.1% | -5.9% |
2010 | 16.1% | 11.7% | -0.5% |
2011 | 13.7% | 6.2% | -1.9% |
2012 | 20.7% | -2.0% | 3.0% |
2013 | 7.8% | 3.8% | 3.3% |
2014 | 2.1% | -2.3% | -8.8% |
Source: Herbalife, Tupperware and USANA filings. Year over year data computed based on most comparable available information for the US market. |
Hard Catalysts Coming in 2H:
The one thing bulls and bears agree on is that the FTC will issue its ruling sometime this year. I obviously think Herbalife will prevail. If they do, it will be a major catalyst for the stock. Besides the analysis I laid out above, there is some reading of the tea leaves to be done. In the recent Bostick case, in which a judge approved a settlement with Herbalife, the judge stated in summary, “a reasonable fact finder could conclude Herbalife does not operate an illegal pyramid scheme”, among other pro Herbalife statements. Additionally, an FTC Chairwoman, Edith Ramirez, shared a stage with Pamela Jones Harbour at an event in February.
The business model changes discussed above should also begin to bear fruit, perhaps as soon as 3Q. A return to growth would be a major catalyst for the stock, so looking forward to 2016, you should see roughly $7.00 per share of earnings and double digit sales growth on a very uncapital intensive business. Furthermore, the company would have been given a clean bill of legal health from the U.S. government and withstood the most aggressive well-funded short-selling attack ever. The company has an extremely dedicated customer base, which one could argue is close to religion (go to a sales meeting and you will see what I mean). Herbalife has a historical growth rate of roughly 13%, but the recent changes, I believe, will propel them to 20% over the next few years. Additionally, the advent of social media should seemingly boost the viability and growth rates of MLMs in general. So what will the market pay for this? My guess would be 20-30x with additional upside from further buybacks and a possibility of a short-squeeze. Conservatively, I believe the stock will hit $140 over the next 18 months, or 20x 2016 EPS.
Risks:
The main risk for Herbalife is that the company faces severe penalties from the FTC, potentially forcing them to shut down in the U.S. As I laid out in my analysis above, I see this as a very remote possibility, but in any legal or regulatory process, the chance of an unforeseen outcome is there. Being conservative, the U.S. is only 18% of will assume a 30% cut to earnings power and get EPS of $3.99. Now, even with this, I still believe the risk is still more short-term, as I expect the rest of the world to be largely unaffected by the U.S., and one could easily argue for 15x multiple, put a $60 valuation on Herbalife, and still see upside from today’s still depressed levels. However, the short-term pain could admittedly be very severe. It’s quite possible to see EPS with costs being a little more sticky short-term, dropping below $3.50, and the market assuming the worst and having the stock trade for 6x and let’s call it $20.00. This is short-term and once again a very remote possibility.
Of course HLF is a complex system and growth may not return, which would put the shares a lot closer to fair value and eliminate a lot of the upside.
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