Shares of Herbalife Ltd (HLF) hit a 52-week high of $78.50 on Dec 17 and eventually closed at $75.76. The increased momentum in the shares came after Herbalife’s new UK-based auditor PricewaterhouseCoopers (PwC) announced the completion of re-audit of Herbalife’s financial statements of more than three years and found no material changes to its prior financial statements.
In fact, shares of this nutrition company have been rising since it reported impressive third-quarter results on Oct 28. Shares of this Zacks Rank #2 (Buy) company closed at $75.76 on Dec 17, with the share price soaring 140.9% year-to-date.
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The company’s long-term estimated earnings per share (EPS) growth rate is 15.32%. Average volume of shares traded over the last three months came in at approximately 2,668K.
Re-Audit of Results
On Dec 16, PwC completed the re-audit of the Herbalife’s financial records for fiscal years 2010, 2011 and 2012 as well as part of 2013, and did not find any material changes in the financial statements. The re-audit was due to the company engaging PwC as its new independent auditor. Herbalife’s former independent auditor, KPMG LLP (‘KPMG’) resigned in May following insider trading allegations against an executive of the accounting firm and not because of any discrepancies in Herbalife’s financial statements or its accounting practices. The re-audit also removed the uncertainty of running a pyramid scheme business.
The company had been facing accusations from hedge fund manager William Ackman and the Belgian consumer organization Test-Aankoop regarding its pyramid scheme business model i.e. deceptive marketing practices employed for improving business. Per the accusation, through such a scheme, the company earns most of its money by recruiting new sales people and not from the products that it sells. However, on Dec 3, 2013, a Belgian court quashed the allegations and stated that the company’s sales model complied with Belgian law.
Activist investor Bill Ackman also criticized Herbalife for misguiding investors by distorting its financial statements. In fact, Ackman argued that it is not the role of an auditor to prove that Herbalife is a pyramid scheme and instead will be proved by the regulators. On the other hand, another investor Carl Icahn has been supporting Herbalife and has increased his stake in the company.
Herbalife has been consistently denying Ackman’s claims and defending itself with strong results. Moreover, since its impressive third-quarter earnings reported on Oct 28, 2013, the company’s share price increased 12.1%. Earnings of $1.41 surpassed the Zacks Consensus Estimate by 23.7% and the prior-year earnings by 44%. Revenues of $1.2 billion also beat the Zacks Consensus Estimate by 1.59% and grew 19% from the year-ago quarter. In fact, the company posted a positive four-quarter average earnings surprise of 15.46%. With 13.0% volume growth in the quarter, we believe that solid demand for its products (especially weight-management products), product innovations and numerous growth strategies will drive the stock going forward.
Other Stocks to Consider
Some other stocks worth considering in the retail sector include Conns Inc. (CONN), CVS Caremark Corporation (CVS), and Best Buy Co. Inc. (BBY). While Conns holds a Zacks Rank #1 (Strong Buy), CVS and Best Buy Co. carry a Zacks Rank #2.