Globally known MLM based healthcare product maker Herbalife (HLF, Financial) has some major players in finance betting against the company due to its controversial practices. Ever since the US dollar had been gaining in strength since November 2014 versus other major currencies, and also the news of pending probes against the company coming to light, the stock seems to be going downhill. After Herbalife had posted its below-expected earning of Q3 2014, analysts like Timothy Ramey of Pivotal Research Group, has come down heavily to cut down on estimates of the stock price, from $110 to $75. The EPS estimates have been cropped as well, going from $1.34 to $1.22, alongside the 2015 full-year estimates, going down from $5.50 to $5.00. The net income from Q3 2014 went down by as much as 92%, owing to the pre-tax charges it faces from the reassessment of audit of assets and liabilities in the Venezuelan Bolivar. In short, there are problems all around.
How Herbalife managed to create enemies
Being a noted company makes noted enemies along the line. It is a well-known fact that Herbalife uses the MLM model to recruit new distributors and promote its products via the channel. According to billionaire hedge fund boss Bill Ackman (Trades, Portfolio), the endless commission scheme which pays for a distributor’s downlink to unlimited numbers, is a pyramid scheme, or rather a Ponzi scheme. In 2013, ever since Ackman spoke out first at the Ira Sohn Investment conference in New York, the stocks of Herbalife had been trading around the price range of mid-30s. In opposition to this assessment by Ackman, other billionaire investors like Carl Icahn (Trades, Portfolio) and Dan Loeb took exception, which resulted in the shooting of the prices up to $81 a share by January 2014. Come early 2015, the prices are back in the mid-$30 range, and according to Ackman, will hit further rock bottom, until of course the government steps in to have the enterprise shut down. To add some more pain to injury, the Federal Trade Commission (FTC) is conducting its probe into the pyramid scheme of Herbalife, other than the one headed by the Securities and Exchange Commission (SEC).
In recent developments, Perry Capital, headed by another hedge fund billionaire Richard Perry (Trades, Portfolio), divested their stake of 5.6 million shares in the company, stated to be worth $243.9 million at the start of Q4 2014. It is noteworthy that Perry Capital was once a part of the trio that stood against Bill Ackman (Trades, Portfolio)’s assessment of the company, but the recent developments have actually turned Perry against Herbalife resulting in a sizable chunk of the stock being up for grabs.
Competition News
Competing health and nutrition based company Amway has been in a bit of hot weather as well. The 2014 sales figures established that there has been an 8% decline in volumes, bringing down revenue to $10.8 billion. Its largest market, China, has seen a decline in sales, and a stronger dollar, resulting in less cash coming into the company. However, President Doug DeVos feels that this is not going to be a reason for halting or trimming down expansion and hiring patterns across various markets. Amway intends to go ahead as they always would, and Doug recalls the mid 90’s Asian market crisis, when situations were similar but Amway did ‘ride it out’.
Final Thoughts
The immediate future shows little hope for the Herbalife stock to rise like it did last year. It won’t change especially until the FTC and SEC grant them a clean slate on the pending issues. What is further aggravating the problem is that bigger hedge funds are betting against the company, and with such large volumes of the stock landing on the market, the prices will continue to spiral downwards until something happens out of the blue. The optimism regarding Herbalife stock could perhaps be seen in 2016, when analysts say that the dollar would have a more cemented place against other currencies, which would give the developing markets like China a more even position, which in turn would push in more dollars into the main company in the US. However, net growth is something still far off the horizon.
