Herbalife Ltd. (NYSE:HLF) shares have risen 98 percent so far this year, possibly thanks to the fact that Bill Ackman called attention to the company. He started a public battle with the company late last year when he called it a pyramid scheme and said he was shorting it. But Wall Street apparently doesn’t care what he thinks, and neither do analysts at D.A. Davidson & Co.


Herbalife, Other MLMs growing rapidly

In analyst Timothy S. Ramey’s recent research note, he said that investors have not only rewarded Herbalife for its growth this year, but also other multi-level marketing companies, including Nu Skin Enterprises, Inc. (NYSE:NUS) and USANA Health Sciences, Inc. (NYSE:USNA). In June, Ramey flip-flopped big time on Herbalife, calling it his “single best idea” just days after downgrading the stock in light of the controversy surrounding its auditor.

Before Bill Ackman’s publicly announced short of Herbalife Ltd. (NYSE:HLF), few investors paid much attention to the company or its stock. Ramey questions whether the publicity created by Ackman has brought attention to the business opportunities created by MLMs like Herbalife, Nu Skin and USANA.

“Isn’t it funny to think that a $0 price target once seemed so real to the Herbalife shorts?” Ramey mused in his latest report.

Will Herbalife be officially called a pyramid scheme?

Ramey said his firm and “numerous other market participants” have found that Ackman’s claims about Herbalife being an illegal pyramid scheme are “completely false.” As such, he doesn’t think there’s much of a chance that the company will receive that label from officials, even though there is an ongoing push by Ackman and now a number of lawmakers who want regulators to look into whether the company is preying on minorities and low income families.

The analyst said Ackman’s latest arguments about Herbalife Ltd. (NYSE:HLF) seem to suggest that he also knows that regulators probably won’t label the company a pyramid scheme. “He is stirring little fights on little issues rather than the big go-to-zero story,” Ramey wrote. Specifically, he points to safety issues recently raised regarding the possible presence of metal shards in an Herbalife product that the company claims never left its factory.

He doesn’t believe Ackman’s thesis that Herbalife shares will fall to $0, so he said at this point investors are simply arguing valuation. He has a Buy rating and a $92 per share price target on Herbalife based on 16 times his 2014 earnings per share estimate of $5.75 per share.

Herbalife could do a share buyback

However, he said his estimate for the company could go up if the company does a significant share buyback. He thinks that Herbalife Ltd. (NYSE:HLF), Nu Skin Enterprises, Inc. (NYSE:NUS) and USANA Health Sciences, Inc. (NYSE:USNA) could all begin aggressive share repurchase programs.

In terms of Herbalife specifically, he suspects that the company will announce plans to begin a leveraged recapitalization next month. He expects the company to announce a $2 billion share buyback after it releases its re-audited financial statements. He believes the company can do this with a debt to earnings before interest, taxes, depreciation and amortization rate of 2.5 times or less.

If the company does this, he said it would raise his 2014 earnings per share estimate by $1.10 to $6.85 per share.

Canadian regulators labeled one Herbalife-affiliated business a pyramid scheme

One thing Ramey doesn’t mention in his report is a recent investigation conducted by the Financial Times. Dan McCrum reported last week that Canadian regulators ruled in the past that Global Online Systems was a criminal pyramid scheme. That business became Online Business Systems, which before this year focused on recruiting distributors for Herbalife Ltd. (NYSE:HLF).

Herbalife distanced itself from OBS only recently—almost a decade after Canadian regulators ruled that the company under its previous name was an illegal pyramid scheme. This raises questions about the types of practices Herbalife was tolerating within its network, even as recently as last year.