Gathering New Information about Stocks, Health, and Sports

Introduction

Herbalife (HLF) is a $2.81 billion company in the personal & household product industry. Market capitalization competitors in this industry include Clorox, Alberto-Culver, and Tupperware Brands. The personal & household product industry is up 3.85% over the past year compared to the S&P 500 which is down 12.91% during the same period. Over the past month, the industry has been up 5.94%, while the S&P 500 has been down 1.36%. Strong technical trends may be indicative of a continued expansion in this industry. Evidence comes from a potential turnaround in general equities. Moreover, as there seems to be evidence of confidence in equities, personal and household product stocks like Herbalife will see future benefits. Also Herbalife’s growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what Herbalife produces. According to Reuters, Herbalife “sells weight management, nutritional supplement, energy and fitness products, and personal care products.” The company further divides its operations into four different categories. These categories include weight management, targeted nutrition, energy and fitness, and outer nutrition. The company sells its products to more than 60 companies globally, taking advantage of current exchange rate inefficiencies. The targeted audience is consumers looking to lose weight. And as the population continues to face an increasing obesity epidemic, these types of products are an excellent way to motivate these unenthused individuals to begin losing weight. More specific on the business segments, the weight management products uses diet types of weight reduction motivators. These types of products include pills and other drugs that users can take. However, if this unappealing to a client, he or she can purchase products from the targeted nutrition business segment. These foods include healthy vitamins and minerals used for a productive lifestyle. In addition, clients can take part in the energy and fitness segment for other products used to give energy during times of exercises. Overall, Herbalife’s business model is solid and is support by strong fundamental data.

Growth

Herbalife has illustrated solid growth prospects over the past year. According to Reuters, Herbalife reported a $2.14 billion revenue product last year. This number is up over 15.70% than it was the previous year. Compared to the industry’s average of 0.78%, investors see the relative strength compared to other competitors. This number is higher than the company’s five year average of 14.43%. Moreover, competitor annual averages of 11.72% (Alberto-Culver) and 6.22% (Clorox) are similar to Herbalife’s current figures. And given that Herbalife’s five year average of 14.43% is consistent to the industry’s five year average of 9.43%, this company has the potential to move even higher. Herbalife’s earnings grew at a strong 54.88% last year—a number much higher than the industry average. Competitors such as Tupperware only saw an increase of 17.63% and Clorox saw a disappointing increase in earnings of 3.37%. Therefore, both earnings and revenue growth is strong for Herbalife.

In addition, herbalfie has kept its costs under control. According to Reuters, Herbalife has reported gross, operating, and net profit margins of 79.99%, 14.79%, and 9.48% respectively over the past year. Moreover, these numbers are above the industry averages of 6.78%, 1.18%, and 0.70% respectively. The numbers are also above or near the company’s five year average respective numbers of 79.67%, 12.83%, and 5.58%. This comparison illustrates a history of strong cost controls and positively-related consistency. The current averages are also better (business model respected) than competitor Tupperware’s respective operating and net income averages of 7.28%, and 6.02%. The same comparison can be made for Alberto-Culver and Clorox. Therefore, Herbalife has proved to be a solid company in this industry. Its services are well-controlled cost wise, especially to direct market-cap competitors.

Compiling all this information together and investors comes across ROE. Over the past year, Herbalife reported an ROE of 66.11%. Therefore, out of all shareholder equity, more than 66% (near five year average of 44.51%) comes from earnings instead of debt or stock. This number is much stronger compared to the industry average of 1.54%, and the number is better than some competitor averages of 23.84% (Alberto-Culver) and 45.65% (Apollo). Therefore, Herbalife has a history of strong earnings per its equity share—which reflects the strong capital gain movement over the past year. And if history is any indication, there should be no reason why Herbalife cannot continue its success. The same logic applies to Herbalife’s 20.00% ROA (above industry average) and 29.67% ROI (above industry average).

Valuation

With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not strictly the case. Herbalife has a forward P/E ratio of 14.46 and a price to sales ratio of 1.27 compared to the industry’s respective 11.42 and 0.34, which shows a relatively overvalued status. In comparison, the rest of the market cap competitors have ratios that higher than Herbalife. Tupperware has a forward price to earnings ratio of 19.37 and price to sales ratio of 1.14. What makes Herbalife’s figures are more enticing is these competing firms aren’t growing so greatly as strongly as Herbalife. Herbalife can now be seen as both a growing and valued company. Moreover, Herbalife has a relatively low PEG (0.85) ratio compared to other competitors’ numbers as well.

Efficiency

Herbalife is efficient. Inventory turnover at 3.50 is strong compared to other industry market-cap rivals (Clorox). Moreover, asset turnover is also strong at 2.11 compared to competitor figures. Receivables turnover were at 9.66, but cash is not an issue for Herbalife In terms of liquidation, Herbalife’s current ratio is at 1.32. This number is a bit risky, but the company’s capital expenditures have increased (43.34%) which means further increases in capacity and economies of scale may be present in the future, because of this financing. Moreover, institutions own 95% of all Herbalfie shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability. The dividend rate of 1.83% is also high.

Technical Analysis

Herbalife performed great in the past year. The company’s share price has increased 5.39% year-to-year. This type of growth is beautiful for a recessionary-type economy, especially considering the fact that the housing market and construction is doing so poorly. There seems to be some support at the 35 dollar share price range dating back to late July 2008. The last time Herbalife reached this amount the company rebounded and appreciated 13%. There is a possibility a similar or better situation could occur in the future.

More specific to the current month, Herbalife illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 43.12, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Herbalife according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

Herbalife is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
July 18th, 2008