Herbalife Ltd. (HLF) Gaining Momentum But FTC Probe Gives Pause

Herbalife Ltd. (HLF) Gaining Momentum But FTC Probe Gives Pause
Herbalife Ltd.

Herbalife shares took a dive on Tuesday following China’s decision to devalue the yuan, and today doesn’t look much better for the company’s stock. The multi-level marketing company relies heavily on growth in China, so its stock is trending downward with the stocks of other companies with major exposure to China.

Herbalife picking up steam

The Chinese central bank’s decision to devalue the nation’s currency even further today is just wreaking further havoc on the stocks of China-exposed companies. As of this writing, shares of Herbalife were down another 0.57% at $59.36 per share in early trading.

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In a report dated Aug. 11, Sterne Agee CRT analyst April Scee gave Herbalife credit for the momentum it is gaining. She stated that multi-level marketing companies like Herbalife are “momentum businesses” in general so this is an important point. She viewed the company’s latest earnings report as positive and believes that consensus estimates may increase more quickly than most are expecting.

Herbalife educates Sales Leaders

One of the interesting points she pulled out of Herbalife’s commentary on its earnings was related to messaging. She noted that “activist, press and regulatory scrutiny” made Sales Leaders unsure about what they could say about their income from Herbalife and what claims they could make about the company’s products.

However, the company appears to have educated them, making them more comfortable about what they could say. As a result, Scee believes that the disruption in Sales Leader recruitment will start coming to an end.

Support for Herbalife’s business model

She also pointed out that “respected” third-party partners like the American Red Cross and the Special Olympics are supporting Herbalife’s products, which she said is making the company’s business model more credible. Also Cristiano Ronaldo, considered by some to be the world’s top athlete, supports Herbalife, even appearing at a Nutrition Club meeting.

This is particularly important in light of Federal Trade Commission’s ongoing investigation and the alleged Securities and Exchange Commission probe, which appeared to have been confirmed by Probes Reporter in February. Also Herbalife made a “stealth disclosure” of the investigation in regulatory filings. John Gavin of Probes Reporter is awaiting an updated response from the SEC for clues about whether the SEC investigation may still be going on.

Herbalife seeing easier comparisons

After activist investor Bill Ackman alleged that Herbalife was a pyramid scheme, management started making some changes to the company’s business model. For example, they set limits on first orders, eliminated field sales and upped regulatory compliance.

Scee pointed out that these changes have mostly been “cycled,” and thus the negative impacts from them are coming to an end. Comparable sales in the U.S. are have become especially easier, which the analyst said is “disproportionally important from a sentiment perspective” even though the U.S. makes up less than 20% of the company’s sales.

She expects to see negative organic growth again in the current quarter. However, she thinks the upward trajectory of estimates is probably going to be good enough to support Herbalife shares despite the fact that sentiment remains low.

Will regulators make an example of Herbalife?

The one thing that’s given her pause on Herbalife is the ongoing FTC investigation, which she thinks could be a serious disrupter for the company. She doesn’t believe it is a pyramid scheme or that its business practices are deceptive, but she notes that the timing of the FTC’s decision is unclear.

Further, she thinks the FTC might make an example of Herbalife and change some of the rules. Any change has the potential to disrupt sales and cost quite a bit of money to implement. A negative FTC decision could even impact sales outside of the U.S., she believes.

As a result, she remains Neutral-rated on Herbalife. She made no mention of the apparent SEC investigation and what she thinks of it.

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