Herbalife Ltd. (NYSE:HLF) Healthy Q4 and guides for buyback Accretion; Maintain buy, $87 price target Scott Van Winkle, CFA – Canaccord Genuity

Herbalife: Investment recommendation

We believe Herbalife Ltd. (NYSE:HLF)’s efficient business model along with deployment of its daily consumption models globally will continue to drive double-digit revenue and earnings growth.

Herbalife HLF

Herbalife: Investment highlights

  • Q4 results consistent with the recent pre-announcement. China and C/S America drove impressive growth, while North America growth remained consistent.
  • F2014 adj. EPS guidance raised $0.40 at the midpoint. Q1 guidance raised a penny on modest debt deal accretion to reflect recent buyback activity.
  • F2014 EPS estimate goes to $6.00 from $5.65. Our estimates increase to reflect 9.9M share repurchase completed, but do not yet assume buyback with all of the incremental convertible note proceeds.

Herbalife: Investment Conclusion

We didn’t expect any major surprises on the Q4 call given the pre-announcement just a couple of weeks ago. Sure enough, Q4 was generally true to form, with some regional variability versus our forecast, but with favorable growth in the regions generating the strongest growth and consistent domestic growth trends. Revenue, volume point and active sales leader growth remain healthy and consistent to trend, while China and C/S America continue to drive impressive gains. North American metrics are exhibiting nice consistency on a two-year stacked basis, while EMEA is also performing well. Mexico trends improved sequentially, while Asia Pacific looks a touch softer on continued softness in Korea given the relative maturity of the market. With Q4 largely as expected and the recent debt financing completed, any change to recently issued F2014 guidance was clearly to be the focal point of the quarterly report. A $0.40 upward revision to the midpoint of the prior EPS range reflects the recent buyback from the convertible note financing, and the assumptions underpinning guidance (volume point growth up 6.5%-8.5% and sales growth up 7.5%-9.5%) look very achievable in light of current trends. Our $0.35 per share F2014 favorable EPS estimate increase is a touch more modest than the upwards guidance revision as our currency forecasts look a touch more conservative than the January rates utilized in guidance (20 basis point difference in growth) and our forecasts don’t yet assume an additional share repurchase with the remaining $300 million of convertible note proceeds (we still assume $50M/quarter of standard buyback in Q2-Q4). Our math suggests there would be perhaps a dime or more of EPS upside to our current F2014 forecast on this incremental share repurchase alone. The Q4 results support our investment thesis and we reiterate our BUY rating.