Timothy Ramey, CFA  just cannot get enough of those yummy shakes! The food, beverage, and nutrition industries analyst at DA Davidson seems to find ways to create news regarding Herbalife Ltd. (NYSE:HLF) even when there is seemingly little (or no) news on the topic. The analyst is out with a new report about Ackman’s reported loss in the MLM company. Ramey also counts the long list of top shareholders including Fidelity, Putnam, Morgan Stanley (which own basically every stock in the world) and Chapman (who manages a tiny drop of money). Obviously Ramey wouldn’t write a report just to mock Ackman, so there must be a lot of value in it. Therefore, we present his recent report without further comment.


Tim Ramey ‘HLF: UPDATE – Pershing Square’s Short is $1.6 Billion’

An article published by Michelle Celarier  of NY Post offered a level of specificity about the size of the Ackman short that was particularly interesting, and heretofore unconfirmed. The short is described as 14% of the $10.7 billion portfolio as of August 31st, indicating a position as of that date of short 24.5 million shares, which today is a $1.6 billion short position. The Post cited as a source the August Investor Letter for Pershing Square, stating that Pershing has a $260 million loss on the position, putting the average sale price at $50.50, a bit higher than we had previously thought, but certainly a believable number.

As of August 15th there were 29.4 million shares sold short. It must be daunting to have on the long side of the trade Carl Icahn, Fidelity Investments, Morgan Stanley (NYSE:MS), William Stiritz, Soros Fund Management, Capital World and Putnam Investments ¡V just to take the top seven active holders. Add Chapman, Bronte and Perry Capital to the mix as well.

We were surprised by Mr. William Stiritz’s filing as a 5.2% owner of Herbalife on Monday– not because we didn’t know he was an owner, we did. We were just surprised that he would, very intentionally, cross the 5% holder mark and go public with all of the hassles and scrutiny that filing brings.
I’ve known Bill Stiritz for 25 years and he has a reputation for doing leveraged deals where everybody wins. He has an unblemished record with the banks, and equity investors who invested alongside Mr. Stiritz have tended to see full returns as well. The book The Outsiders by Thorndyke devotes a chapter to Mr. Stiritz accomplishments. I can think of few who are even in his league both as an investor and as a food industry executive. Perhaps most interesting, Bill developed soy protein isolates while CEO of Ralston-Purina and ultimately sold that business to E I Du Pont De Nemours And Co (NYSE:DD) which now calls it Solae. Solae’s largest customer is Herbalife. Mr. Stiritz can trace his daily Herbalife shake back to products that he developed 30 years ago.
It would not surprise us to see Mr. Stiritz join the Herbalife Board. His experience in consumer packaged goods would be incredibly valuable. His view of capital allocation as the single most important job of the Board and the CEO, is very much aligned with Carl Icahn’s views and, we believe the views of the senior management team.
September will be interesting. We believe the company will have audited financials in place this month. It will likely issue investment-grade debt to finance the massive repurchase we foresee (and the company acknowledges this was in the works when they lost their accountant last March). If they put the audit to bed, it would be a possibility to see a negotiated settlement with KPMG, its former auditor. The statement that they would have done a large leveraged repurchase but for the KPMG event establishes the “opportunity cost¨ Herbalife paid to be frozen without audit opinion. Damages KPMG will owe to Herbalife could well be $500 million to $1 billion. Could this be a September event too?

We continue to rate Herbalife BUY with a $92 price target. As we stated on January 2nd, it is our 2013 Single Best Idea, and with the shares up 93% year-to-date we see multiple catalysts to drive the valuation higher. Herbalife is a high-quality growth stock with double-digit revenue growth averaging 19.5% for the four years ending 2013.  “The go-to-zero¨ hypothesis has been dismissed by our work and by serious work done by Herbalife¡¦s top investors.