Stocks

Herbalife Ltd. (HLF) Price Target Cut, Weak Volumes Noted

Herbalife warned in its latest earnings report that this year will be more difficult than previously thought, but the stock remains just as polarizing as ever. Bulls continue to believe that the regulatory overhang will be resolved with minimal damage to the company, while bears complain about the focus on the bottom line beat in the latest earnings report.

Herbalife Ltd. HLF

Bulls unconcerned by projected volume declines

In a report dated March 2, Canaccord Genuity analysts Scott Van Winkle and Mark Sigal maintained their Buy rating but slashed their price target for Herbalife from $50 to $42 per share. Interestingly, they argue the bull case even though they point out that a significant chunk of the guidance miss was due to volume expectations that are lower than expected.

This volume miss has largely been ignored by the bulls. Instead, most say currency exchange headwinds are almost entirely to blame for management’s weak guidance. However, the Canaccord Genuity team estimates that about 70 cents per share of Herbalife’s downward guidance revision was due to the expectation of lower volumes this year. They attribute only 60 cents per share to currency headwinds.

Why is Herbalife expecting volumes to decline?

Herbalife bulls blame the volume declines almost entirely on the company’s transition to the new policies, which are aimed at quieting concerns that the company might be a pyramid scheme. The argument is that volumes will eventually recover, but bears are understandably skeptical.

The pyramid scheme allegations raised by activist investor Bill Ackman date back more than two years, and bears argue that those allegations are to blame for the declining volumes. So which is it? Either way, the crux of this part of the Herbalife debate is whether the company’s volumes will recover and if so, how quickly.

What about the regulatory investigations?

Naturally, bulls are not worried about the Federal Trade Commission’s investigation. However, most ignore the report from Probes Reporter that Herbalife is probably being investigated by the Securities and Exchange Commission as well. The SEC practically confirmed that it is conducting an investigation connected to Herbalife somehow in a recent letter to Probes Reporter, although the nature of that investigation and how directly it involves the company is unclear.

The Canaccord Genuity team thinks Herbalife stock is “significantly undervalued,” but they say that assumes a “reasonable resolution to regulatory scrutiny.” Additionally, they believe that once the regulatory issue surrounding Herbalife is over, the multi-level marketing industry as a whole could breathe a sigh of relief and serve as an upward catalyst for other MLM stocks.

Shares of Herbalife rose as much as 0.66% to $30.64 per share during regular trading hours today.