If you're new to this story, activist hedge fund manager Bill Ackman is currently short Herbalife (now with put options) because he's convinced that the company is a pyramid scheme and will be shut down by the FTC. In Bill Ackman's Q3 2013 letter, he said:
At yesterday’s closing price of $72.84, we believe the potential reward from being short Herbalife is extremely attractive relative to the risk of loss. Using the average analysts’ price target of $77 per share – which assumes that the Company is operating entirely legally – investors have less than 6% upside compared with 100% downside if the Company is determined to be a pyramid scheme by regulators.
In my career, I have not seen a less attractive risk-reward ratio than a long investment in Herbalife common stock at current levels.
It will be interesting to see if Professor Ackman ends up being right. HLF is currently at $77, the "average analysts' price target." Bill Stiritz, CEO of Post Holdings Inc., is taking the other side of Ackman's trade. According to Bloomberg, Bill Stiritz recently boosted his stake in Herbalife to 6.4%.
Bill Stiritz, chief executive officer of Post Holdings Inc. (POST), the Raisin Bran maker, boosted his holding in Herbalife Ltd. (HLF) to 6.4 percent and said he’ll seek talks with the nutrition company.
Discussions may include potential financing and share repurchase strategies, as well as ways to leverage Herbalife’s product distribution, Stiritz said in a filing yesterday.
The investor said last week that he’s willing to take part in a leveraged buyout of the company that would reward shareholders and help Herbalife fend off allegations by hedge fund billionaire Bill Ackman, who for a year has accused it of operating an illegal pyramid scheme.
Carl Icahn owns 16.8% of Herbalife as well. But even with a leveraged share buyback, S&P Capital IQ thinks HLF is still only worth $75. S&P analysts downgraded Herbalife to sell on December 30, 2013.
S&P analysts have a $75 price target on Herbalife Ltd. (NYSE:HLF)’s stock. According to Graves, that number is a premium to S&P’s historic valuation of Herbalife, as it is based on the view that a stock repurchase will happen and will add $0.35 to 2014 EPS.
Here's more from S&P Capital IQ's report via TD Ameritrade:
We think the stock price more than adequately reflects anticipation of increased share repurchase by HLF. In our view, the stock has benefited from a completed re-audit of HLF financial statements, and news that HLF has no material changes in amended SEC filings. We still expect that concerns about its business model, the sustainability of its growth, and possible regulatory scrutiny, will limit valuation of the stock. Our $75 target price reflects a P/E discount to a recent average for other sizable consumer staples stocks. Indicated dividend yields 1.5%.
Without an LBO, I think Ackman will eventually be right in the next recession when consumption falls off a cliff. Until then, here's the HLF trend line to watch.
*FTC Announces Initiative Against Deceptive Claims Made by National Marketers of Fad Weight Loss Products (From Food Additives to Skin Cream to Dietary Supplements, FTC Cracks Down) (Federal Trade Commission)
Herbalife, Nu Skin Fall As FTC Eyes Weight-Loss Ads (IBD)
Herbalife, Nu Skin shares drop on FTC plans (AP)