Wednesday, June 18, 2014

Herbalife Ltd. (HLF) Q4 Earnings Preview: What To Watch?

Herbalife Ltd. (NYSE:HLF) plans to release its fourth quarter and full-year 2013 financial results on Feb.18. It would hold a conference call on Feb. 19 at 8 a.m. PST (11 a.m. EST) to discuss its recent results and provide an update on current business trends.

Herbalife is a global nutrition company that sells weight-management, nutrition and personal care products. Herbalife products are sold in more than 90 countries through a network of independent distributors.

Wall Street expects Herbalife to earn $1.24 a share, according to analysts polled by Thomson Reuters. The consensus estimate implies an increase of 18.1 percent from last year's $1.05 a share. The company sees fourth quarter adjusted EPS of $1.26 to $1.30.

[Related -Herbalife Ltd. (HLF) Q3 Earnings Preview: What To Watch?]

Herbalife's earnings have topped the Street's view in all of the past four quarters, with upside surprise ranging between 1.9 and 23.7 percent. The consensus estimate has gained 7 cents in the past 90 days, and three analysts raised their quarterly profit views in the last month. This reflects the ongoing positive sentiment of the Street. The company has grown profit for the last nine quarters.

Quarterly sales are estimated to grow 17.6 percent to $1.25 billion from $1.06 billion a year-ago. In the past four quarters, the company has recorded an average sales growth of 18.5 percent while the company expects revenue growth of 19.8 percent for the fourth quarter.

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For the full year, Herbalife is estimated to report earnings of $5.32 a share on revenue of $4.81 billion. The company forecasts full-year earnings of $5.35 to $5.39 a share and sales growth of 18.5 percent

Volume points would be one of the key metrics to watch. The company sees volume points for the full year and fourth quarter 2013 to increase approximately 13.1 percent and 12.7 percent, respectively.

Third-quarter worldwide volume growth was 14 percent, with a spurt in all regions including North America, South and Central America, and EMEA. The Street would be focusing on the volume growth on emerging markets such as China and India apart from South & Central America. China witnessed a growth of 71 percent in volume points in the third quarter.

Further, inventory and accounts receivables figures would be keenly monitored. As of Sept.30, the company had inventories of $347.73 million, and receivables valued at $109.83 million.

The long-term debt of $875 million should also be on investors' radar. The company had a cash balance of about $892.55 million at the end of the third quarter.

The company recently entered into an amendment relating to its $500 million senior term loan and $700 million senior revolving loan credit facility. The amendment will increase the highest applicable margin payable by Herbalife by 0.50 percent when its total leverage ratio exceeds 2.50 to 1.00 and increase the permitted consolidated total leverage ratio of Herbalife under the credit facility.

The company also sold $1 billion of convertible senior notes due 2019 with the intention to use the majority of net proceeds for share repurchases. The initial purchasers of the notes will be Bank of America Merrill Lynch, Credit Suisse, HSBC and Morgan Stanley.

Herbalife has been in the news ever since William Ackman, the activist manager of hedge fund Pershing Square, announced a large short-position in the company calling it a pyramid scheme that would fail soon.

Herbalife has 2.5 million distributors and Ackman said the company posts its profits from selling its products amongst distributors and not to the consumers. He claimed that 90 percent of the profits from the distributors are earned by adding other distributors to the network. Ackman calls for a regulatory probe on Herbalife.

Senator Ed Markey is also lobbying for an investigation into accusations that the company is running a pyramid scheme. However, there haven't been signs of any regulatory probe in the U.S. on Herbalife.

Moreover, the company's fundamental thesis remains strong as consumers are becoming more health conscious, driving demand for Herbalife's products. These healthy products attract consumers to join the distribution network to gain monetary benefits and this augments sales.

In December, the company filed amended financial statements for 2010, 2011 and 2012 as audited by PricewaterhouseCoopers (PwC) with no material changes. In April, Herbalife's auditor KPMG resigned due to alleged insider trading by an auditor.

According to regulatory filings, some investors have added positions, and some have sold the stock during the quarter. Hayman Capital sold its entire stake of over 2.2 million Herbalife shares.

On the other hand, Susquehanna disclosed a 6.7 percent stake (in excess of 6.8 million shares) in the company. Morgan Stanley currently owns more than 2.9 million shares of Herbalife, accounting for 2.9 percent stake in nutrition-supplement maker.

Investors would expect the company to update on its buyback plans. The company's board of directors has increased the existing share repurchase authorization to an available balance of $1.5 billion. The company's former share repurchase authorization of $1 billion had an available balance of $653 million.

In addition, the market will keep an eye on the 2014 outlook. The company's sees 2014 volume point growth and adjusted EPS of 6.5 percent to 8.5 percent and $5.45 to $5.65, respectively. For the first quarter, it expects adjusted EPS of $1.24 to $1.28.

For the third quarter, Los Angeles, California-based Herbalife's profit rose to $142.0 million or $1.32 a share from $111.9 million or 98 cents a share last year. Adjusted earnings were $1.41 a share. Sales for the third quarter grew 19 percent to $1.21 billion.

Shares of Herbalife have gained 75 percent in the last one year but dropped 1.5 percent since its last earnings report and 17 percent in the last one month. The stock trades 11.4 times its forward earnings and traded between $34.52 and $83.51 during the past 52-weeks. An upside surprise and upbeat outlook could take the stock close to $75.

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