Herbalife Ltd. (HLF) 3Q Earnings Preview

Herbalife Ltd. (HLF) 3Q Earnings Preview

Herbalife Ltd. (NYSE:HLF), the controversial multi-level marketing company selling nutritional and weight management products, is predicted to continue to deliver double-digit earnings growth by Timothy Ramey, analyst at D.A. Davidson & Co. The company is scheduled to release its third quarter financial results on Tuesday, October 29.

Herbalife Ltd. (HLF) 3Q Earnings Preview

Ramey estimated that the operating EPS for Herbalife Ltd. (NYSE:HLF) in the third quarter will increase by 13.8 percent to $1.18, from $1.04 in the same period a year earlier. Six analysts covering the stock have an average operating EPS estimate of around $1.13 to $1.14. For the full year, the analyst estimated that the company will be able to deliver $5.00 operating EPS compared with the $4.99 Street estimate, and the guidance provided by the company in the range of $4.83 to $4.95.

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Herbalife will report a growth rate of 17.5 percent

In terms of sales, the analysts anticipate that Herbalife Ltd. (NYSE:HLF) will report a growth rate of 17.5 percent driven by the continued strong demand for its Formula 1 and Herbalife Ltd. (NYSE:HLF) 24 weight management products. Ramey said, “The focus remains on the expansion of the daily consumption model, creating longer-term customers through branding, and increasing distributor engagement activities.”

Ramey projected that the operating profit of the company will increase by 7.8 percent, and its EBIT margin is expected to decline from 15.8 percent last year to 14.5 percent this year. According to Ramey, Herbalife’s estimated gross margin of 79.5 percent of sales is down by 70bp from its 80.2 percent gross margin in the same period a year ago. He anticipated that the company’s SG&A as a percent of sales will come in at around 32 percent of sales, an increase of 10bp compared to last year, and royal overrides will also increase by 50bp to 33 percent of sales.

The analyst noted the previous statement of Jeff Dunn, one of the directors of Herbalife Ltd. (NYSE:HLF), that the results of the re-audit of the company’s financial statements by Pricewaterhouse Coopers will be a “clean read.” He said it is not surprising to see an announcement of the result of the re-audit with its earnings release next week.

Ramey also noted that 24.48 million shares of 22.1 percent of diluted shares of Herbalife Ltd. (NYSE:HLF) are still held short as of September 30, 2013. According to him, Herbalife is the most heavily shorted among the multi-level marketing companies covered by the research firm.

Move by Bill Ackman reduces loss risk

Activist investor Bill Ackman of Pershing Square Capital previously covered 40 percent of the approximately 24.5 million shares short position on Herbalife Ltd. (NYSE:HLF), and replaced it with an OTC put options (around 10 million shares). Ramey commented that Ackman’s move “significantly reduced the risk of unlimited losses, but has increased the certainty of a total loss of the original $1 billion short position as the puts expire worthless. The counter party to his trades indeed has a winning hand.”

Ramey maintained his Buy rating for the shares of Herbalife Ltd. (NYSE:HLF) with a price target of $92 per share.

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