Will Herbalife End Up a Penny Stock?

Tickers in this article: AAPL DIS HLF NKE RIMM

Slide 9 displays 2011 Herbalife sales at $5.4 billion, but Slide 11 asks, "Has anyone ever purchased an Herbalife product?" Did the person who made slide 11 read 9? When I read a company is selling billions of dollars of product annually, I don't have a need to ask whether anyone is buying, I already know they are. The person who made slide 11 further demonstrates a lack of situational awareness by not knowing the key brand of Herbalife (hint, Herbalife).

Slides 13 & 14 illustrate that Herbalife doesn't have a ready-to-drink offering of its top selling product, although competitors do. My takeaway from the slide is that Herbalife has greater revenue potential if they add a ready-to-drink product. If I were a potential/current supplier to Herbalife, this is exactly the type of sales presentation slide I would use to demonstrate more opportunity.

Other than displaying product pricing power for Herbalife, I am unsure what else can be taken away from Slides 14 through 23. People are willing to pay more for Herbalife's products. There's nothing new here; many companies are able to sell their products at a premium over competitors.

Apple (AAPL) and Research In Motion (RIMM) are two well-known product makers, but one sells its products at a premium over the others'.

The examples used in Slide 23, Walt Disney (DIS) and Nike (NKE) also support the concept that some companies are able to charge much higher for their products than others.

The presentation appears to be more sleight of hand than anything of real substance. Do most new distributors end up having anything to show for their efforts beyond a credit card bill and an experience? Probably not, but that's par for the course for almost all newly minted self-employed business people.

As a short-term trade, I sold volatility with a long bias based on technical analysis of the chart pattern and the high option premium. Herbalife is oversold in my opinion.

Is Herbalife a good investment? With a forward yield of more than 4% and a single-digit forward price-to-earnings ratio, it's compelling.

Ackman alleges that Herbalife is an illegal organization, so some investors might think a significant downside risk is that the government could shut it down.

But I don't think the downside risk reasonably includes a forced shutdown by the government.

Of course, forced changes in compensation, rules, recruiting as a result of government demands are always a real possibility, but it's hard to argue that such business model adjustments are not already priced in.

I respect Mr. Ackman, and if he states a company is worth zero, I pay attention. You ignore him at your peril, as many Herbalife investors now realize.

But he also has people making slides questioning whether anyone has bought products from a company that generates more than $5 billion a year in sales.