HLF - Herbalife

[hyten1]

anyone have any thoughts on HLF, especially after the recent drop

[Cardboard]

I would stay away. These companies with their "pyramidal structure" are difficult to analyze and you can never tell for sure if there is fraud or not.

 

I bought puts in the past on Prepaid Legal. There was a lot of questionable things about the company while they kept on buying back shares agressively. Eventually, the company was taken private by MidOcean or a private equity firm. So I guess that it was legit or they got really screwed.

 

So guys like Einhorn may be using their clout to drive the share price down temporarily while accumulating large stakes to eventually destroy the shorts who have followed him. Jesse Livermore type of stuff. It would be easy for him considering his growing reputation with shorts and the type of rumours that always surround these types of companies.

 

Cardboard

[fareastwarriors]

CNBC interview with Bill Ackman on Herbalife short.

 

http://video.cnbc.com/gallery/?play=1&video=3000136735

 

 

[fareastwarriors]

 

Herbalife Disputes Ackman's Claim of 'Pyramid Scheme'

 

 

http://www.cnbc.com/id/100328657

 

CEO disputes Ackman's claim.

 

[ItsAValueTrap]

So guys like Einhorn may be using their clout to drive the share price down temporarily while accumulating large stakes to eventually destroy the shorts who have followed him.

How would he do that?  Wouldn't he have to disclose his long position?

 

Maybe Einhorn is secretly like Barry Minkow (somebody else who is a vocal short seller... now back in jail) but it doesn't seem like something he would do.  Did you ever read his book?  By talking about his short positions and spending his valuable time writing an entire book... it seems like he feels like he's gotta put himself on the line to do what's right.  Publicizing short positions exposes yourself to risks... lawsuits, SEC inquiries, short squeezes, etc.  Even if he wins any legal battles, his hedge fund will get bathed in legal fees.

[ItsAValueTrap]

I get burned a lot when I invest in companies with unethical management so I try to avoid them.  Something stupid always happens.  They will pay themselves too much and suck at running the business (Jemtec, sells below liquidation value), dilute shareholders when the share price is low, run off with all the money (QXM/XING), are secretly committing fraud, etc.

 

2- On a somewhat related now, the Bronte Capital blog comments on pyramid marketing schemes:

http://brontecapital.blogspot.ca/2012/12/trust-me-i-run-pyramid-marketing-scheme.html

"Trust me - I run a pyramid marketing scheme"

 

Multi-level marketing schemes are a highly profitable business for those running them. If you manage to get two to twenty thousand people selling things to their friends and giving you a cut you are going to get rich.

 

The road to those riches are laced with the dreams of all the people who hold tupperware or candle parties or even worse - sell weight loss schemes or insurance.

 

Listed multi-level marketing schemes (such as Nu-Skin) are a really strange investment. The basic proposition is that they offer investors is the claim they have a really profitable businesses conning people out of their money and getting them to cash in their friendships.

 

The pitch summarises: I am a crook but you can trust me. I am your crook.

 

3- Inherently I think that MLM legally generates high returns on capital.  Herbalife, as far as I can tell, has a real product that people actually want (because they are insecure about their weight... :/).  But I don't like the stocks.  A lack of integrity often works against investors.

[tooskinneejs]

Anyone here ever use or distribute Herbalife products?  Come on, fess up!  If so, what's the scoop?

 

Listening to Ackman on CNBC was interesting.  He essentially said he believes their financials are correct (i.e., the numbers aren't made up), but he is shorting because he believes the business model won't last (i.e., they will eventually run out of new distributors/customers).  And yet the company has been around for a long time.  And people have been wasting money on nutritional supplements of questionable value for a long time (e.g., 90% of the stuff in a GNC store).

[fareastwarriors]

I admit I have used it.

 

I think the products are fine. It is not some miracle drug or anything like that. I tried some of their protein bars, vitamins, and smoothie mixes. Not the best tasting stuff in the world but I believe the quality was fine. I see no difference between Herbalife's products and something found at a grocery store.

 

 

 

[fareastwarriors]

http://www.bloomberg.com/video/bill-ackman-certain-herbalife-is-a-pyramid-scheme-RtAHqsHLSPK_zGuRA2LCzw.html

 

bloomberg interview

[Parsad]

I don't know much about Herbalife other than seeing the products, but I would take Ackman's analysis with a grain of salt until you do your own due diligence.  MLM is not a pyramid scheme in any manner...it depends on how the overrides and compensation is actually dispersed.  You would have to examine each MLM business individually.  I plan on examining Herbalife over the weekend and seeing exactly how they account for everything.  Ackman has been wrong before...remember the blowout on Target!  So do your own due diligence and then decide for yourself. 

 

MLM in itself is no different than the broadly used override compensation structure of most financial, insurance and investment bank businesses.  The broker/dealer network in Canada is pretty much similar to any MLM structure.  The dealer's get a cut of the broker's business, and the broker's get overrides on their junior brokers.  Just the number of levels are lower in the override compensation structure, whereas MLM structures can get quite deep.  Cheers! 

[Guest rimm_never_sleeps]

for someone trying to decide if they want to be a herbalife distributor, doing some research online is going to pull up the Ackman presentation, and the Ackman website, and lots of brand new investigations about whether or not this is a pyramid. so Ackman, by taking this public in this manner, has created a kind of permanent negative feedback loop that damages the Co.

[siddharth18]

Isn't this a case of binary outcome? Either this company will weather the storm and it'll be business as usual or it will cease to exist. The company has no net tangible assets so entire valuation is based on the assumption of its existence and its earning power.

 

From what little I gathered about the company, it seems the brand itself has the earnings power. They spend hundreds of millions on endorsements and advertising the brand itself. As long as people buy the product because it has Herbalife logo on it, it should do fine.

 

In other words, even if the MLM portion of HLF is impermissible, it can still sell its products normally via retailers (which it does currently in China and is seeing success).

 

Assuming no future revenue growth, I get annual owners earnings (Cash from Operations + Dep - Cap Ex) for last 12 months --> $516 + $73 - $93 = $496 million which comes out to $4.62 per share.

 

For DCF I used aggressive 14% discount rate and terminal growth rate of 3% to arrive at $43.26 per share intrinsic value

 

What's the best way to play this? LEAPs ?

[maxprogram]

My 2 cents: I live in Utah, the MLM capitol of the world. I would never invest in any MLM company personally, and believe that *most* of them are pyramid schemes. Of course, that depends on your precise definition and how loose you are with the definition of "pyramid scheme".

 

I've known many people (not financially savvy) who have been caught up in these things, lost a lot of money, and don't even realize what happened to them. Most of the products are hugely marked-up bullshit, like vitamins. Name every one of the principles in Cialdini's book and it's there. I've also seen people at the "top" of the pyramid who have made millions (and in a few cases 100's of millions) from this -- houses around the world, Ferrari's, etc etc.

 

I have no position in Herbalife or any other MLM but would love to see companies like it collapse. For those considering an investment, think of one of Pabrai's investment tenets: only invest in situations where it's a win-win-win for the company, customers, and suppliers. (That means most customers, not the top 1%).

[stylized_fact]

for someone trying to decide if they want to be a herbalife distributor, doing some research online is going to pull up the Ackman presentation, and the Ackman website, and lots of brand new investigations about whether or not this is a pyramid. so Ackman, by taking this public in this manner, has created a kind of permanent negative feedback loop that damages the Co.

 

I would guess that most people researching herbalife online have already crossed the Rubicon -- they are just looking for confirmation of their good judgement, and aspersions from some hedge fund guy are just a confusing diversion.  Ackman may have succeeded in garnering attention from the FTC, and that may have significant implications for their business.

 

I'm sure the herbalife CEO doesn't plan to take any of this lying down.

 

http://faculty.chicagobooth.edu/john.cochrane/teaching/Empirical_Asset_Pricing/lamont_go_down_fighting.pdf

[Parsad]

You guys do realize that Buffett & Berkshire bought an MLM business a long time ago...The Pampered Chef.  Cheers!

[Guest rimm_never_sleeps]

for someone trying to decide if they want to be a herbalife distributor, doing some research online is going to pull up the Ackman presentation, and the Ackman website, and lots of brand new investigations about whether or not this is a pyramid. so Ackman, by taking this public in this manner, has created a kind of permanent negative feedback loop that damages the Co.

 

I would guess that most people researching herbalife online have already crossed the Rubicon -- they are just looking for confirmation of their good judgement, and aspersions from some hedge fund guy are just a confusing diversion.  Ackman may have succeeded in garnering attention from the FTC, and that may have significant implications for their business.

 

I'm sure the herbalife CEO doesn't plan to take any of this lying down.

 

http://faculty.chicagobooth.edu/john.cochrane/teaching/Empirical_Asset_Pricing/lamont_go_down_fighting.pdf

 

that was then. before this event. I suspect that one of the first things somebody sees when researching this company from this day forward is going to be Ackman's work, or work he inspires journalists and investigators to do. not necessarily this presentation, but of particular interest will be a new website he is going to create to tell this sordid story simply and effectively.

[Edward]

I don't know much about Herbalife other than seeing the products, but I would take Ackman's analysis with a grain of salt until you do your own due diligence.  MLM is not a pyramid scheme in any manner...it depends on how the overrides and compensation is actually dispersed.

I would like to chime in as I have been briefly involved in one such MLM company called Nikken in the past. Its business methods are fairly similar to Herbalife.

 

Most MLM's are not pure pyramids which lends them a benefit of the doubt and I agree that each has to be analysed on its own. MLM doesn't automatically means pyramid, it just probably does.

 

As a distributor of an MLM, there are 2 ways of making money:

 

1. Sell products to outside customers.

 

2. Sell the business opportunity to become a distributor.

 

When most of the effort of distributors is directed to selling the business opportunity rather than the products, then it becomes a pyramid.

 

Herbalife strikes me very much like it is of the second sort since most of the end users of its products are actually distributors themselves. This goes contrary to normal business practices - imagine if there was a bank who is mainly lending to its employees, or an insurer who was primarily insuring its agents. My personal experience with distributors is that they do not make a serious effort to sell you the products, but always try to bundle them with the business opportunity. This is true for at least 5 such companies operating in Israel - Sunrider, Herbalife, Nikken, NuSkin, Agel.

 

My personal take on MLM is that one has to assume it is a pyramid scheme until proven otherwise to be on the safe side. Same as with investing in Chinese companies listed in the US - always expect some sort of fraud.

 

I am aware of Berkshire buying the Pampered Chef. Considering the reputation of Buffet it's probably one of the legitimate MLM businesses, like SOHU is probably a legitimate Chinese US listed company.

[siddharth18]

I don't know much about Herbalife other than seeing the products, but I would take Ackman's analysis with a grain of salt until you do your own due diligence.  MLM is not a pyramid scheme in any manner...it depends on how the overrides and compensation is actually dispersed.

I would like to chime in as I have been briefly involved in one such MLM company called Nikken in the past. Its business methods are fairly similar to Herbalife.

 

Most MLM's are not pure pyramids which lends them a benefit of the doubt and I agree that each has to be analysed on its own. MLM doesn't automatically means pyramid, it just probably does.

 

As a distributor of an MLM, there are 2 ways of making money:

 

1. Sell products to outside customers.

 

2. Sell the business opportunity to become a distributor.

 

When most of the effort of distributors is directed to selling the business opportunity rather than the products, then it becomes a pyramid.

 

Herbalife strikes me very much like it is of the second sort since most of the end users of its products are actually distributors themselves. This goes contrary to normal business practices - imagine if there was a bank who is mainly lending to its employees, or an insurer who was primarily insuring its agents. My personal experience with distributors is that they do not make a serious effort to sell you the products, but always try to bundle them with the business opportunity. This is true for at least 5 such companies operating in Israel - Sunrider, Herbalife, Nikken, NuSkin, Agel.

 

My personal take on MLM is that one has to assume it is a pyramid scheme until proven otherwise to be on the safe side. Same as with investing in Chinese companies listed in the US - always expect some sort of fraud.

 

I am aware of Berkshire buying the Pampered Chef. Considering the reputation of Buffet it's probably one of the legitimate MLM businesses, like SOHU is probably a legitimate Chinese US listed company.

 

Much thanks for the info.

 

Some questions I have are:

 

1. Aren't the "distributors" just end users themselves, signing up because they like the product and want to keep it and use it for themselves?

 

2. If Herbalife faces too much heat, can't it just sell its products traditionally in USA, like it does in China?

 

3. If Herbalife is shut down in USA, it loses a lot of business. North America does 20% volume according to Q3 2012 report (http://ir.herbalife.com/releasedetail.cfm?ReleaseID=716927), but it should do fine operating in other countries, right?

 

Apparently Ackman's target is $0 per share...and he owns the entire short position - his whim could shake the stock.

 

HLF CFO spent $3 million few weeks ago to buy HLF on open market.

[king888]

These MLM companies are very popular in SE Asia. Because we have almost zero control on pyramid scheme. I remembered Herbalife entered Bangkok 12-13 years ago. And I enrolled the program also because I was a university student who wanted to make an extra income. But the process to recruiting other people took too much time. And the recruiting seminar was so kind of brain-wasing event. Everyone just talked their wealth, cars, house ,etc. So I decided to stop because I thought that life has anything more than just getting rich. HLF still exists in my country but not so popular as it was 10 years ago. And we have new name coming almost every years ie. Nu skin ,Unicity etc.

 

These MLM scheme making a lot of money  in Asia because it is Asian culture to not saying "No" . I guess.

 

 

 

 

[Edward]

1. Aren't the "distributors" just end users themselves, signing up because they like the product and want to keep it and use it for themselves?

 

2. If Herbalife faces too much heat, can't it just sell its products traditionally in USA, like it does in China?

 

3. If Herbalife is shut down in USA, it loses a lot of business. North America does 20% volume according to Q3 2012 report (http://ir.herbalife.com/releasedetail.cfm?ReleaseID=716927), but it should do fine operating in other countries, right?

 

Apparently Ackman's target is $0 per share...and he owns the entire short position - his whim could shake the stock.

 

HLF CFO spent $3 million few weeks ago to buy HLF on open market.

1. They are end users, but from my experience they use it as long as they are involved with the business opportunity. I think there is a very strong placebo effect in place because you can effectively buy the same commodity product for a quarter of the price. Probably there are few people that continue to consume the products long term after they are no longer active on the business side.

 

2. They can. It would mean a severe drop in both margins and volumes as the product is essentially a commodity. Current margins can only be maintained if you bundle the product with some sort of psychological "booster" to its appeal, such as the business opportunity. It can also be done via strong branding like Coca-Cola or patent protection, which are not really possible in this case without massive long term investments.

 

3. A lot of countries look up to and follow practices in the US and the EU. if the US declares it a pyramid, more will look into the case and possibly do the same.

 

Looking at the balance sheet, it looks like there are not a lot of net assets unrelated to the main business. I wouldn't say 0$ for sure, but with some legal fines it could certainly happen. The valuation completely depends on the legal status of the business.

 

The company doesn't have the financial means to acquire enough stock to put pressure on Ackman. They have to refute his thesis conclusively or just hang on for a while vs possible investigations.

 

These MLM companies are very popular in SE Asia. Because we have almost zero control on pyramid scheme. I remembered Herbalife entered Bangkok 12-13 years ago. And I enrolled the program also because I was a university student who wanted to make an extra income. But the process to recruiting other people took too much time. And the recruiting seminar was so kind of brain-wasing event. Everyone just talked their wealth, cars, house ,etc. So I decided to stop because I thought that life has anything more than just getting rich. HLF still exists in my country but not so popular as it was 10 years ago. And we have new name coming almost every years ie. Nu skin ,Unicity etc.

I second this impression of such businesses. These are very popular in eastern Europe as well.

[fareastwarriors]

http://www.bloomberg.com/news/2012-12-21/herbalife-bulls-take-on-short-ackman-after-pyramid-claim-retail.html

 

Herbalife Bulls Take On Short Ackman After Pyramid Claim

[siddharth18]

1. They are end users, but from my experience they use it as long as they are involved with the business opportunity. I think there is a very strong placebo effect in place because you can effectively buy the same commodity product for a quarter of the price. Probably there are few people that continue to consume the products long term after they are no longer active on the business side.

 

It's intriguing. I don't think US regulators can force HLF to change its business model in all of the 80+ countries. At worst, they'll fine HLF millions and force it to change its business model in USA. But entire North American only is responsible for 20% of HLF's revenue.

 

 

2. They can. It would mean a severe drop in both margins and volumes as the product is essentially a commodity. Current margins can only be maintained if you bundle the product with some sort of psychological "booster" to its appeal, such as the business opportunity. It can also be done via strong branding like Coca-Cola or patent protection, which are not really possible in this case without massive long term investments.

 

 

Company spends hundreds of millions in brand advertising, so I'd say those that rely on the product for their well-being are buying it because of the herbalife logo. The brand value is the only reason why HLF has the earnings power even with non-existant net tangible assets.

 

3. A lot of countries look up to and follow practices in the US and the EU. if the US declares it a pyramid, more will look into the case and possibly do the same.

 

Not sure about that. Online betting/gambling is legal is many parts of the world too, but isn't in USA.

 

Looking at the balance sheet, it looks like there are not a lot of net assets unrelated to the main business. I wouldn't say 0$ for sure, but with some legal fines it could certainly happen. The valuation completely depends on the legal status of the business.

 

Agreed, that the valuation is completely dependent on its future earnings, not any assets.

 

 

The company doesn't have the financial means to acquire enough stock to put pressure on Ackman. They have to refute his thesis conclusively or just hang on for a while vs possible investigations.

 

 

Ackman is short $1 billion - entire short position on this stock is his. Company has authorized $1 billion buyback, has $320 million in cash according to Q3 2012 10-Q and can raise some from the credit facility (?)

 

I personally think HLF's reaction to Ackman's presentation will be more important than just buybacks themselves, at least in the short term, in affecting the sentiment.

 

For what it's worth - most analysts have stuck with hold, some have even rated it buy. I realize this mostly affects institutional holdings.

 

What's amazing to me is that even after the past scrutiny from SEC, FTC, lawsuits, Herbalife continues to thrive.

[Edward]

It's intriguing. I don't think US regulators can force HLF to change its business model in all of the 80+ countries. At worst, they'll fine HLF millions and force it to change its business model in USA. But entire North American only is responsible for 20% of HLF's revenue.

I think that it is unreasonable to assume that if Herbalife loses legal status in the US it will receive no serious scrutiny elsewhere. It is true that most of the business will probably continue operating as normal around the world regardless for a while.

 

Company spends hundreds of millions in brand advertising, so I'd say those that rely on the product for their well-being are buying it because of the herbalife logo. The brand value is the only reason why HLF has the earnings power even with non-existant net tangible assets.

A logical conclusion but probably not the case. These companies tend to spend minimal amounts on advertising. Herbalife stated in 2004 that they do not report their advertising expenses separately in the financials due to the amounts being "de minimis". I believe them :)

 

A lot of products are being bought by the distributors themselves because it is required to do so in order to advance in the Herbalife distributor levels. If you do a random survey around my country about Herbalife, the brand mostly stands for a pyramid scheme, not for any products. No one actually knows what Herbalife does exactly except current and past distributors.

 

Maybe this is different in the US, but I somehow doubt it considering Ackman's findings match my own impression.

 

Ackman is short $1 billion - entire short position on this stock is his. Company has authorized $1 billion buyback, has $320 million in cash according to Q3 2012 10-Q and can raise some from the credit facility (?)

 

I personally think HLF's reaction to Ackman's presentation will be more important than just buybacks themselves, at least in the short term, in affecting the sentiment.

 

For what it's worth - most analysts have stuck with hold, some have even rated it buy. I realize this mostly affects institutional holdings.

 

What's amazing to me is that even after the past scrutiny from SEC, FTC, lawsuits, Herbalife continues to thrive.

Ackman is short around 20M shares, which is a 540M$ position at 27$ per share. The company can probably buy 10%, maybe even 20% of outstanding shares but that is not enough. It also doesn't do anything for disproving Ackman's argument.

 

In fact, their response supports Ackman's thesis. The proper response was to ignore him and move on, or at least to make a decent counter-argument. They took the worst path.

 

Government entities usually are very poor at doing their supposed job. Recall that the SEC had ample evidence against Bernard Madoff as early as 2000. They did NOTHING.

 

 

[wknecht]

Government entities usually are very poor at doing their supposed job. Recall that the SEC had ample evidence against Bernard Madoff as early as 2000. They did NOTHING.

The SEC has shifted more resources to combating Ponzi schemes since Madoff, so if the investigations were more recent one would think they would now be armed with the necessary knowledge and resources. But yeah, not too sure about the FTC's track record, but I think the SEC investigated Madoff 6 times.

[compoundinglife]

What's amazing to me is that even after the past scrutiny from SEC, FTC, lawsuits, Herbalife continues to thrive.

 

This past year I read "Fooling some of the people all of the time" by Einhorn about his Allied Capital short. Allied Capital continued to "thrive" despite the fact they were cooking the books, making illegal loans and that he laid it all out for the SEC and SBA . If the financial crisis did not happen its possible they have could have had a much longer run. I know nothing about Herbalife, so I have no opinion on the thesis, but I guess my point is that companies in the past that turned out to be frauds were sometimes able to pull it off for a long time despite negative attention from regulators or authorities and investors.