Sometimes I think that it would get frustrating for Bill Ackman since he keeps asking dozens of questions every quarter, projects new allegations against Herbalife Ltd. (NYSE:HLF) and goes on and on and on about Herbalife being a pyramid scheme, but the company keeps on ignoring him and the shares keep on rising. However Herbalife is not as deaf as you might think as they have a very proactive ‘spokesperson‘ in the form of Tim Ramey of D.A. Davidson.
Ackman makes more mistakes
So once again when all others just ignore what Ackman says about Herbalife, and focus on J.C. Penney instead (where Ackman is all set to get rid of 39 million shares), Ramey does not miss a beat. He has a point-by-point comeback for what he deems worthy of response to comments made by Ackman in his Q2 letter. He says that while Bill Ackman admitted that he had made some mistakes in his career, he made several more in the process, and those are of course the questions Ackman raises about Herbalife’s recent earnings in the Q2 investor letter, which were thankfully not as many as we have seen on previous occasions.
However, Ramey is not as blinded by Herbalife’s galore and value that he does not see Ackman’s merits, he writes in his note (emphasis ours), ” The simple thesis – Herbalife is an illegal pyramid scheme, is really the only thing that matters. Once that is debunked, and it has been, then all other arguments are simply about the correct valuation. Ackman makes valid points in some of his work. But the fact that what we believe are distortions, fabrications and mathematical impossibilities remain the basis of much of his work should destroy the credibility of the work as a whole”.
One time charge or long-term nuisance for Herbalife
One of the comments that Ackman made in his Q2 letter was that Herbalife’s operating margins has shown below average growth in the past quarter, with just a 3% increase. Ramey counters that Ackman adds in the cost of $9.7 million in his EBIT GAAP number, which the company incurred while defending its honor against Ackman. The 9.7 million is a one time charge which all analysts agree should not be added to comps. Well, very hopeful analysts I would say since this is the second straight quarter Herbalife has taken write downs on legal and advisory services spent on defending itself against Ackman. Yet so far Ackman seems to be going nowhere, and last quarter Herbalife took a $15 million post tax write down, and in Q1 a $9.5 million charge, so maybe its not a one time charge after all.
Ridiculous ideas from Ackman
Ramey also says that Herbalife believes in the value of Made in USA, and that is why it is building a first class production facility in Winston-Salem, North Carolina and not moving operations outside of the U.S. However, Ackman alleges that the expensive facility is being built to bury the several lapses in product quality that have been observed in the existing plant in Lake Forest.
Ramey maintains buy rating at $92, adding, “the idea that Lake Forest is in any way a substandard production facility or will later be shut down is ridiculous.”
We will have to see about that one.