The Bull Case
The bull case has several different parts to it. On one side of the equation, the 13 companies that the FTC investigated and found to be pyramid schemes were all around for less than 10 years. 11 of them were around for less than 5 years. So how could Herbalife, which has been around for 32 years and has been publically traded for 8, have duped the SEC and FTC for so long. Also, the SEC has already looked into Herbalife twice, and neither time did they find that Herbalife was a pyramid scheme. On the other side, Herbalife has grown its EPS by 23.85% annually over the past 5 years and has grown its revenues by 12.2% annual over that same period. With a PE (TTM) of 9.9 and a forward PE of 8, this company (assuming it is legitimate) is very undervalued. Herbalife also pays out a 3.1% dividend yield and has a great track record of buying back its stock.
Herbalife has around 39 million shares sold short right now, so the MOASS (mother of all short squeezes) could happen if Herbalife can continue to grow in the 20% range, steps up its buyback program, goes private (as Carl seems to want), and contests the pyramid scheme accusations head on. Herbalife beat estimates and raised its guidance, but its conference call was a disaster. Management spent so much time talking (I listened to the whole thing, boy was it hard), it become very long and boring. There was very little time for Q&A, and the questions they received were trivial until 2 at the end. Management has to prove to investors that it is a legit company and its financials are stable. During the call management failed to give any color on what Carl wanted, how they expect to fight the SEC investigation, or what they were going to do in regards to their undervalued stock price. In order for Herbalife to go back above $40 it needs to prove its a legit company, which it failed to do so this week.
Other MLM’s
There are other MLM’s out there that are publicly traded. is one of them. Nu Skin Enterprises, Inc. (NYSE:NUS) sells personal care and dietary supplements under the Pharmanex brand. These products include Element bars, Nu Skin 180 Skin Mist, True Face Line Corrector, and the like. All these products are legitimate and you could find many similar products at your local Wal-Mart or Target. Nu Skin isn’t a pyramid scheme, yet they also have an MLM structure with over 850,000 distributors. They used to have issues though; back in the 1990’s the FTC investigated Nu Skin for its MLM practices and its promotion of its products. In 1992, 1994, and 1997 it settled all its legal issues with regulators and its distributors over its corporate structure and overstating the effectiveness of its products. The biggest issue was that it was stating that its products were a lot more effective than they were and that it was overstating the money its distributors make. Management turned the company around and now it is ranked as one of Forbes “100 Most Trustworthy Companies”. If Herbalife was a pyramid scheme, how come the FTC investigated Nu Skin (a company that is much smaller than Herbalife) 20 years ago but hasn’t been able to find anything about Herbalife until a multi-billionaire decides to short the stock then talk about it.
