Herbalife: Why the FTC Investigation May Be Overblown


The Federal Trade Commission (FTC) has kicked off an investigation into Herbalife (HLF) to the merriment of billionaire investor Bill Ackman. Why? The frontman of Pershing Square Capital Management has been on a crusade for more than a year to topple the multi-level marketing firm, accusing it of being a pyramid scheme. Some analysts are very bullish on the stock. They believe fears over its businesses practices may be overblown.

Shares of the weight-loss and nutrition products company plunged as much as 16% percent Wednesday following the news. They managed to rebound during the session and pare the loss to 7%. Herbalife shares have lost 23% year to date while returning a healthy 46% in the past 12 months. The Los Angeles-based company issued a press release stating that it will cooperate fully with the FTC investigation in hopes of clearing its name. It assured that its business practices meet all laws and regulations.

Ackman has sold short $1 billion in Herbalife shares to profit from falling prices. Pershing created a website called FactsAboutHerbalife.com to aggregate evidence that Herbalife is a pyramid scheme. Herbalife exaggerates how much money new distributors are likely to make and understates the unlikelihood they will make the amount advertised, Pershing states in 13-page presentation titled Who Wants to be a Millionaire: A Short Thesis on Herbalife.

Herbalife’s distributors will most likely fail, lose money and are pressured to recruit other distributors underneath them. Only the top 1% of distributors make most of the money and its payment scheme is much more pyramidal than other multi-level marketing firms, the report stated

Tim Ramey, senior research analyst at D.A.Davidson & Co., on the other hand, has declared Herbalife his No. 1 investment idea for 2014. He rates Herbalife shares a buy with a $115 price target. That’s nearly double Wednesday’s closing price of $60.57 a share.

The company has been audited twice by big-four auditing firms. Neither of which found anything wrong, Ramey, wrote in an equity report on Jan. 16. PricewaterhouseCoopers (PWC) conducted the second audit with significant consideration to the Ackman’s accusations that it is a pyramid scheme.  But the company is better for having undergone the investigation, Ramey wrote.

Catalysts that would drive share prices higher include a dividend increase, a share buyback and perhaps a leveraged buyout, Ramey wrote. Herbalife enjoys accelerated growth in China, which had a breakout quarter in third quarter with sales reps up 25% and revenue up 77% on volume growth of 71%. Herbalife has grown revenues 20% over the past three years and earnings per share by 30%. It has eclipsed analysts’ earnings forecasts and raised earnings guidance 19 quarters in a row, Ramey wrote.

What other evidence is there suggesting the FTC investigation may be overblown? Herbalife company counts 2.1 million independent distributors in 75 countries that operate under different rules. 2014 sales will rise 10% year over year to $5.2 billion with more than 70% of sales coming from outside the US, S&P Capital IQ forecasts. But earnings will be hurt by changes in currency exchange rates and a higher tax rate.

Herbalife has distributors interact with customers frequently, which encourages customers to use the product daily, Tom Graves, an analyst with S&P Capital IQ wrote in a client note data March 8. The company has $677.6 million remaining in a $1 billion buyback program, as of Sept. 30, 2013. Graves rates Herbalife shares hold with a $65 price target, while acknowledging that regulatory scrutiny will limit its upside.

Among five analysts polled by Thomson Reuters, three have a “buy” rating and two have an “outperform” rating with a target price range of $85 to $94 a share. It currently trades at a discount compared to both its industry and the stock market on some measures. It sports a price-to-earnings ratio of 13 versus 21 for its industry and 18 for the S&P 500. It trades at only 1.5 times sales while the industry’s price-to-sales ratio is 2.2 and the S&P 500’s is 1.7. But its price-to-book ratio is rather high at 12, compared to 5 for the industry and 3 for the S&P 500.

Herbalife issued a statement March 10 in response to Pershing’s accusations, claiming that Ackman misunderstands its business model. Herbalife started selling in China in 2007 and has sought help from government officials to crack down on those who break Chinese laws and its rules, Herbalife stated. Are there any other indications that the FTC investigation may be overblown? Herbalife has 150,000 regular customers, sales at 3,000 brick-and-mortar outlets, and two production plants in China, the company claims.

By Trang Ho


S&P Capital IQ (report)
Thomson Reuters Knowledge (report)
Pershing Square Capital Management (PDF)
The Wall Street Journal

3 Responses to "Herbalife: Why the FTC Investigation May Be Overblown"

  1. Fan of the Droid   December 19, 2014 at 8:22 am

    Look at the stock today, $36 and dropping like a stone. Pershing Square released a video a distributor had secretly recorded showing the top executives at the company admitting that most people lose their money and that they wouldn’t sell it to their own friends and family to consume. If the FTC doesn’t act herbalife will sink under their own weight. Look at their pathetic earnings statements the last two quarters.

  2. X   March 14, 2014 at 11:01 pm

    I sold exactly $150 dollars of these Herbalife products last night, and gave my customer a 7% discount. I don’t get waht all the pyramid scheme blah blah blah is coming from. Herbalife has great products, if you know how to sell, you will sell. If you sit at your couch at home all day and do nothing, you wont make nothing. You sponsor another person teach them how to do what you do and you get rich.

  3. M Wolf   March 13, 2014 at 12:08 pm

    An audit is not going to address the pyramid part of this picture. Read the opinion letter. The requirement is that it fairly represents the financial statements as reported. In that regard you are inferring an answer that you don’t have.


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