Timothy S. Ramey, CFA of D.A. Davidson notes (see more about this analyst here-(D.A. Davidson After Massive Flip Flop Says Herbalife is Now ‘our Single Best Idea’) He was asked these questions of Herbalife Ltd. (NYSE:HLF) yesterday:
Based on a NY Post article by Michelle Celarier We’re assuming your agreement means that Mr. Dahl forfeits future royalties and overrides given that he is going to a competitor. What happens to that money? You pay three levels down, does it just go to the next in line? If so, would that not be a good retention strategy for his downline? Given the annuity value of being a Chairman’s club member, how does he justify the move to himself?
- You are correct that Mr. Dahl forfeits all future royalties overrides and that earned royalties overrides will be paid to the next qualified supervisor. We have no specific comment on Shawn’s justification for moving. On a combined volume basis, Shawn [Dahl] and Anthony [Powell]’s entire organizations represented less than 0.5% of worldwide volume and less than 2% of USA volume in Q1 2013.
- We note that in May, a huge call option, 70,000 contracts, or 7 million shares was exercised. We don’t know if this was a purchase per se – it could have been an offset to another position. If it was a purchase, a purchase of that magnitude would make someone a 7% holder. But we’ve yet to see any filing. As we discussed in our June 13th note, it may well have been Pershing Square hedging their short bet with long calls. We note that while we have called on Pershing Square to reaffirm that they are still short, and have not reduced their short in any way with derivatives, they have not done so.
- Lead-generation was nothing to be proud of, in our opinion. Herbalife Ltd. (NYSE:HLF) has discontinued this practice effective July 1st. We think that is positive from a policy standpoint, but probably a small negative from a growth perspective. Good riddance!
- We reiterate our BUY rating and $78 price target. The company is growing at a rapid pace and it has potential catalysts in the capital structure. Once the re-audit is complete we suspect the short position will be gone, one way or another. We are above the Street for Q2 EPS and $0.12 above consensus for the full year. Herbalife Ltd. (NYSE:HLF) remains our Single Best Idea for 2013.
Jarrel Price of Height Analytics notes that there was a dramatic escalation in the lobbying battle over Herbalife Ltd. (NYSE:HLF) last week with Herbalife management and anti-industry lobbyists meeting with key congressional offices in Washington. While the regulatory risk has gone up a bit given that more lawmakers are now aware of this issue and a few have expressed written concerns to regulators, we do not believe a political dynamic has yet emerged capable of forcing the FTC to act anytime soon.
However, there is more news on Herbalife Ltd. (NYSE:HLF).
Price notes this morning, Michelle Celarier of the New York Post is reporting that “the FTC is considering revisiting” its 2004 Staff Advisory Opinion which outlined (albeit poorly) the Commission’s treatment of internal consumption in its analysis of pyramids. The article suggests the FTC would revisit the guidance in order to clarify that sales within a MLM’s network (internal) do not count toward “retail sales” for the purpose of determining a legal MLM vs. an illegal pyramid.