activist investor at Pershing Square Capital.
Ackman has spent millions investigating Herbalife and, since December 2012, has been screaming “pyramid scheme” hoping federal investigators will listen. It’s an assault aimed at knocking the stock price as far down as it can go. Ackman and Pershing Square Capital have a lot of money on the line and want the stock to go down so their short plays pay off.
But can it?
Most recently, in a room full of investors, Ackman presented the results of his investigations, playing alleged video evidence of fraud perpetrated by the nutrition company.
He even went so far as calling it a totalitarian regime.
But is this the “death blow” to Herbalife Ackman has been promising?
Apparently not. Shares of Herbalife jumped over 20% on the day Ackman took the stage.
Even more telling, notable investors George Soros and Carl Icahn have kept their positions in Herbalife, unconvinced of Ackman’s allegations.
Despite the slander, Herbalife is still alive and kicking.
So should investors try to get in on the action? After all, 68% of American adults reported taking dietary supplements in 2012 and, all together, spend $32 billion on supplements each year. The Nutritional Business Journal’s predicts that the nutritional supplement industry will top $60 billion by 2021.
A Closer Look
Using IU’s Fundamental Factor Test, let’s see how the fundamentals of Herbalife stack up:
- Earnings-per-Share (EPS) Growth: $4.56 – Herbalife’s earnings per share have beaten or met consensus estimates for the last four quarters. This is its strongest case for being a healthy stock. (VERY GOOD)
- Price-to-Earnings (P/E): 14.45 – This puts the company in the middle of the pack compared to its peers. (GOOD)
- Debt-to-Equity: 43.9 – This is one of the highest debt-to-equity ratios in the industry. This means Herbalife likely has been financing a lot of its growth with debt. (VERY BAD)
- Free Cash Flow (FCF) per Share Growth: 645.28% – Herbalife’s FCF has been growing year after year since 2010. Maybe management will be able to pay down that debt. (VERY GOOD)
- Profit Margins: 5.9% – Herbalife’s profit margin last quarter puts it in the middle of the pack or slightly lower than its competitors. (AVERAGE)
- Return on Equity: 100% – This value is well above others in the industry. (VERY GOOD)
Additionally, Herbalife’s revenue is up 12% over this time last year. Except for the debt-to-equity ratio, which is offset somewhat by its solid FCF, we have a picture of a respectable and growing company.
Lingering Accusations
Even so, there’s immense risk. In March 2014, the Federal Trade Commission opened a civil investigation into Herbalife. The probes can take a year or more, keeping risk levels high for the next eight months or more.
For this one, investors should probably stay on the sidelines and pass the popcorn. If you were to ignore Ackman, Herbalife would pass the Fundamental Factor Test and be a “Buy.”
Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.
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