Description

·        HLF is incredibly cheap with its trading below 6X the midpoint of 2022 Guidance and we believe its IRR of over 28% at current prices.  We believe HLF will appreciate over 100% over the next 12 months.

·        A series of one-time events have tipped the company into negative growth, but this should abate next year.

·        HLF’s growth has been dragged down for years by a rising dollar, a trend that cannot continue indefinitely and should reverse.

·        HLF repurchases shares religiously.  The company’s capital light model along with negative equity enables HLF’s growth to increase purchases.

For starters, we view HLF and other successful multi-level-marketers (MLMs) as quasi religions.  Going long on a flourishing religion is a profitable bet.  MLMs that have lasted a long-time are proven durable businesses that will remain so for the foreseeable future.  There are literally no historical examples counter to this statement that we could find.  We believe the Bill Ackman fraud debate has been settled.  (For those who want more info on the Ackman debate and the business please see my previous writeup from 5/26/15.)  Incredibly, the stock price is down since then despite the fraud risk along with the FTC investigation and cutting the share count by over 40%.

Over 100% upside in the next 12 months and the potential for over 6X over the next 5 years:

While many stocks appear cheap after the recent sell-off, few that we can see have the decades of profitable history and growth that HLF does that are this cheap.  We believe that HLF could trade up to 10X earnings next year and still be cheap, with $4.50 of EPS in 2023, that would be well over a 100% return from here.  Longer-term, HLF should trade for a multiple of 15 or higher.  In five years assuming just a 7% growth rate in operating should yield nearly $10.00 in EPS and a $145.00 stock prices or nearly 7X from today’s levels.

A Series of One-Time Events has Tipped HLF into Negative Growth in 2022, But that Should Reverse in 2023:

HLF’s current guidance calls for a 4%-10% decline in sales in 2022, but currencies weakened sales by 3.2% in 1Q 2022.  Assuming that the currency effect stays constant, that is over half the expected decline.  Additionally, the company got roughly 3% of its 2021 sales from Russia and 1% from Ukraine, both markets which have been shut down.  Figure a nearly 4% fall from the Russia-Ukraine war and factor in currencies, and sales would be expected to be flat.  In addition to those two factors, though, this year we had the Chinese lockdowns and China sales fall 37% in 1Q.  China’s COVID issues likely contribute another roughly 3-4% to this year’s sales fall.  Lockdowns in other regions like Vietnam have also impacted the company.  Lastly, as the company pointed out, the recent cohort added during the pandemic is churning off at a higher rate.  HLF blames the weak cohort on a lack of in-person events from which previous cohorts benefitted.   We think this cohort was always a little less committed given when it signed on.  It’s reasonable to think that the people who got their Peloton in April 2020 will be more likely to quit once gyms reopen and there is a similar dynamic here.  It’s unclear how much this impacted HLF sales this year, but the company seems to think this is the biggest factor and responsible for most of the change in guidance, so it’s reasonable to assume this had at least a 6% impact on revenue.

The good news is that all of these factors should be eb, resolve, or reverse by 2023.  So I view HLF as a company whose true underlying growth rate is mid to high single digits, and we should start seeing that play out in 2023.

HLF’s Growth Has been Undercut since 2014 by a Rising Dollar:

As you see from Exhibit 1 above, the dollar’s strength has been HLF’s weakness.  We would also note that the dollar appears to have risen more than its purchasing power parity.  We are not currency traders, but our instincts tell us this is likely due to reverse and of course should not be expected to continue.

HLF is a Stock buyback Machine on Steroids:

HLF has a history of using pretty much every spare penny for buybacks.  (See Exhibit 2 below.)  The miracle of HLF’s business model is that it allows the company to increase its share repurchases as it grows.  At year-end 2021, HLF had total assets of $2,819.8 mln ($2,725.4 mln excluding goodwill) and total liabilities of $4,211.3 mln.  If this ratio can stay constant along with ROA, then for every 1% HLF grows it can apply an additional roughly $15 mln to share repurchases, repurchasing another 0.63% of shares at current prices.  We believe that HLF should be at least a 6% sales growth for a long-time.  With a little bit of operating leverage, we feel safe saying 7% EBIT growth.  This growth allows the company to return an additional 4.4% to shareholders.  So you get an incredible 28.4% IRR at current prices, 17% from Net Income to buyback ($3.75/$22), 4.4% from debt financed growth and 7% in actual growth.  Incredibly due to the wonders of its capital structure and some growth, HLF would still have an IRR of over 13% if it traded at 20X.

So how can we be assured the buybacks will continue?  Beyond the history, buybacks are the natural default choice for HLF as the company has no natural acquisition targets, and it really can’t buy a competitor because the conflicts are too big for the members to take.  (For example, Christianity wouldn’t merge with Hinduism.)  There isn’t much of a supply chain that needs to be filled in, and there really are no big possible growth projects it could enter.  So buybacks or dividends are what’s left, and HLF historically hasn’t paid a dividend.

Catalysts:

Return to Growth in 2023

Continued Share buybacks

Backs against the wall, after a sales decrease, the company has reacted by cutting expenses, other initiatives to improve sales, from a historically very staid approach are possible.  We would note that other MLMs have successfully rolled out social media kits.  HLF doing so, would make the company more competitive.

Catalyst

Return to Growth in 2023

Continued Share buybacks

Backs against the wall, after a sales decrease, the company has reacted by cutting expenses, other initiatives to improve sales, from a historically very staid approach are possible.  We would note that other MLMs have successfully rolled out social media kits.  HLF doing so, would make the company more competitive.