Sterne Agee CRT analyst April Scee said, “Herbalife is not a pyramid scheme.” She initiated coverage on the stock with a Neutral rating and a $53.89 price target.

In a recent note to investors, Scee wrote, “We believe Herbalife’s business practices contain no elements of a pyramid scheme. Herbalife has also put many protections in place that make its business model far more consumer/rep-friendly than peer MLMs (and brick and mortar peers).”

The analyst pointed out that Herbalife’s compliance training that supports best practices for sales leaders. According to her, Herbalife is neither deceptive nor misleading because its sales leaders are required to complete a formal training program before becoming eligible for royalty. The training program includes the dos and doesn’t’s for direct selling. The company also requires members to undergo additional training if they want to open nutrition club. Sales leaders are also required to re-qualify for recertification annually.

 

herballife-comp Herbalife-hlf Herbalife HLFThe analyst emphasized that Herbalife has protections against financial losses a strong compliance function, clear earnings potential disclosure and very low start-up costs. According to Scee, “In our view, neither the consumer nor the representative is harmed suggesting there is no reason for the FTC to find [something] against the company.”

The timing regarding FTC’s ruling remains a concern. There is a possibility for the FTC to change rules, according to Scee. She thinks that it is unlikely for the Commission to impose retroactive fines against the company, but it could incur costs to transform its business.

Herbalife Ltd. HLF

Herbalife’s organic growth remained positive

Scee noted that investors are concerned regarding Herbalife’s dwindling model, which she considered overblown, and the interruption of its double-digit organic sales growth last year. Herbalife achieved a four-year average sales growth of 21%.

The analysts emphasized Herbalife’s organic growth remained positive at approximately 8%, and its initiatives showed improvement in retaining representatives.

Herbalife launched the three-day trial packs of Formula 1 shake and Total control for retail at $11.95 in the United States. According to Scee, the company’s best practices continue to spread across markets, and the trial packs remove the barrier to consumer adoption since the trial cost is cheap. She noted that the initiative was strong in the U.S. and successful in Europe.

Furthermore, Scee noted that Herbalife’s nutrition clubs & healthy active lifestyle initiatives are expanding. The trend began in Mexico, and it is growing in some markets. According to her, the company’s initiatives are attracting consumers that could not afford its product and help create the social network that fuels retail to consumers.

Scee believed that the worst is behind the company. According to her, Herbalife’s Formula a shake and other products are effective in fighting obesity, which is considered as one of the biggest health problems today. Obesity increased the risks of suffering from cardiovascular disease, diabetes, and cancer.

“Herbalife, in our view, is offering obe of the most effective tools for consumers already struggling with their weight. We’re not talking about Formula 1 meal replacement shares, but rather Formula 1 plus de facto Fit Club support groups,” said Scee.

Nu Skin has potential upside near-term

On the other hand, Scee also initiated coverage on the shares of Nu Skin Enterprises with a Neutral rating. She emphasized that they remained on the sideline even if there is a potential upside for the company over the near-term.

According to her, the SEC investigation makes NU Skin an easy target for bears and the company has been slow in reversing its bloated inventory, which points to unresolved demand issues. Scee also pointed out that the company needs to improve its sale leader numbers to alleviate concerns.