Despite prominent recent headlines regarding a new FTC investigation against Herbalife Ltd. (NYSE:HLF), our channel checks indicate still strong momentum in the U.S. business, driven by solid recruiting trends and a successful new product launch.

Herbalife’s U.S. direct selling network continues to generate single-digit growth

Distributor recruiting in the U.S. appears to remain unimpeded despite recent allegations and change in nomenclature to the business model. Following numerous recent conversations we have had with our senior-level Sales Leader contacts within Herbalife Ltd. (NYSE:HLF)’s U.S. direct selling network, we believe the region continues to generate high single-digit growth momentum in total Sales Leaders and Members, who were all previously called Distributors before the 2H:13 change in nomenclature.

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Herbalife Ltd. (HLF)

This trend line appears to be unimpeded despite all the recent negative press, allegations from a prominent and vocal short-seller, and the change in the business model to separate out Members (discount buyers) from Sales Leaders (who active pursue the income opportunity). With the U.S. comprising nearly 20% of sales, such encouragingly strong trends give us greater confidence in Herbalife Ltd. (NYSE:HLF)’s ability to meet or exceed estimates in both Q1 and 2014.

Herbalife’s new product launch building momentum

Recent new product launch also building momentum, likely driving increased sales force productivity in the U.S. Our distributor contacts also universally noted growing momentum among their down-line sales force networks for Herbalife Ltd. (NYSE:HLF)’s newly introduced line of skin care products, known as SKIN. Not only will the SKIN line help diversify the sales mix and boost the productivity of the sales force, but also the product line also likely carries a meaningfully higher gross margin than the core Formula 1 diet shake line, Herbalife’s best-selling product, so should therefore have a beneficial mix shift impact on overall margins. Moreover, we believe sales of skin care products in general, as evidenced by other direct selling competitors such as Nu Skin, result in a “stickier” and longer-lasting customer mix, as opposed to weight loss product customers who often have a tendency to give up on diets after a few months.

Herbalife’s valuation

Given Herbalife Ltd. (NYSE:HLF)’s still strong core business momentum, partially offset by continued headline risk, we believe shares of Herbalife should trade relatively in line with its peer group. This generates a 2014E P/E multiple of 15x, resulting in our PT of $90.