Herbalife Undergoing Major Transformation

 

Bidnessetc.com recently reported: Herbalife Ltd (NYSE:HLF) released its fourth-quarter results on Thursday, coming ahead of earnings but lagging behind the guidance for the full fiscal year 2015.

Barclays analyst Meredith Adler, who has consistently been bullish on Herbalife stock, has a research note out yet again in which she shares her thoughts on the global nutrition company’s recent results.

The analyst has reiterated her Overweight rating on the stock, maintaining the high price target of $64, which depicts an upside potential of an exorbitant 110% over the current price levels. Her price target is based on price-to-earnings (P/E) multiple of 15x FY16 earnings per share (EPS) estimate of $4.22. She further affirms that the alterations to the company’s business model have been able to drive significant growth in the past.

However, the current efforts to make the business more compliant and less risky for the vast distributor base are resulting in slower growth. She says that this slowdown will continue into the next year. She, however, believes that these changes to make the business model more attractive for distributors will ultimately make the company stronger, making its transformation all the more inevitable.

Ms. Adler says in the note: “To remain bullish on HLF, which we are, involves having trust that 1) the company can execute on the changes being rolled out to most global markets early this year, and 2) management is being prudently realistic or conservative in their guidance. We have been bullish for a while, even with the overhang of the FTC investigation and a short seller’s troublemaking, but we recognize that the slowdown in revenues requires a different kind of trust.”

She further suggests that investors need to believe that the changes made would cause a natural, but only short-lived, slowdown in the pace of sales, eventually leading to more involved and productive distributors.

About the earnings result, the analyst stated that the financials were comforting and acknowledged the improvement in Europe, where the new distribution approach has been implemented. She said that because the Venezuelan operations have been slashed into a small business, the adverse currency headwind would also have a minimal impact on earnings. According to her, the company has been able to manage expenses and has a range of contingency plans that it would implement as needed. Its cash flow and cash on hand are also solid and are more than sufficient to repay the $850 million of debt maturing in FY16.

To better reflect the substantial hit forecasted as a result of exchange rate fluctuations and a stronger US dollar, Barclays has adjusted its estimates marginally downward. It maintains its FY15 EPS estimate of $4.05, which puts it slightly below the bottom end of the company’s guidance of $4.10-4.50 per share.

However, the investment firm is slightly cautious, given the lack of visibility in certain markets; for instance, Mexico, which registered a decline of 7%. Hence, it has lowered its first-quarter FY15 estimate by $0.22 to $1.04 per share, nearing the low end of Herbalife’s guidance of $1.0-1.1 per share. Its FY15 EPS estimate of $4.05 is also marginally below the company’s guidance.