Options Trade – Herbalife Ltd. (NYSE:HLF) Calls
Tuesday, February 18, 2014

**OPTIONS TRADE: Buy the HLF Mar 2014 70.000 call (HLF140322C00070000) at or under $3.90, good for the day. Place a protective stop limit at $1.40 and a pre-determined sell at $6.50.

by Ian Harvey

February 18, 2014

Introduction

Herbalife Ltd. (NYSE: HLF) will report its fourth quarter earnings before the market opens on February 19. The stock has underperformed in 2014, losing 16.7% year to date. Analysts have forecast Q4 earnings of $1.17 per share, up from $1.05 during the same period last year.

Herbalife has made a lot of headlines over the last year, mainly due to the bearish bet that activist investor William Ackman made on the stock, claiming the company was nothing more than a glorified pyramid scheme. Ackman's gamble turned disastrous, as many high profile investors came out in favor of the stock, and took opposite positions. The stock has shown great resilience to Ackman's allegations, but it once again came under pressure in mid-January. A report in China's First Financial Daily newspaper that stated suspicion had been surfaced that the company was indeed a pyramid scheme and soon thereafter, there were reports that the Chinese government was looking into the legality of the company's operations. The stock took a hit on the news, but has since found a bottom and has been trending higher over the last month. A big reason why the stock has been rebounding was the company's preliminary earnings results, which it released at the start of February.

Company Details

Herbalife Ltd. is a global nutrition company. The Company sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products as well as personal care products. It distributes and sells its products through a network of independent distributors, using the direct selling channel.

The Company categorizes its science-based products into four principal groups: weight management, targeted nutrition, energy, sports & fitness and Outer Nutrition.

As of December 31, 2012, it sold its products in 88 countries to and through a network of approximately 3.2 million independent distributors.

In China, in order to comply with local laws and regulations, it sells its products through, sales representatives, sales officers, and independent service providers and in retail stores.

On December 31, 2012, the Company acquired a manufacturing facility in Winston-Salem, North Carolina.

Key Statistics for HLF

Current P/E Ratio (ttm) 12.9116
Estimated P/E(12/2013) 12.3562
Relative P/E vs. SPX 0.7608
Earnings Per Share (USD) (ttm) 5.1419
Est. EPS (USD) (12/2013) 5.3730
Est. PEG Ratio 0.7268
Market Cap (M USD) 6,706.08
Shares Outstanding (M) 101.01
30 Day Average Volume 4,469,909
Price/Book (mrq) 14.7617
Price/Sale (ttm) 1.4965
Dividend Indicated Gross Yield 1.81%
Cash Dividend (USD) 0.3000
Dividend Ex-Date 11/07/2013
5 Year Dividend Growth 24.57%
Next Earnings Announcement 02/18/2014

Earnings

The preliminary report suggested net sales were up 18.5% during the quarter, and earnings were expected in a range of $1.26 to $1.30 a share, higher than the $1.17 analysts expect. It also announced it was increasing its buyback program from $1 billion to $1.5 billion.

Herbalife last posted its quarterly earnings results on Wednesday, October 30th. The company reported $1.41 earnings per share for the quarter, beating the analysts’ consensus estimate of $1.14 by $0.27. The company had revenue of $1.20 billion for the quarter, compared to the consensus estimate of $1.20 billion.

During the same quarter last year, the company posted $1.04 earnings per share. Herbalife’s revenue was up 19.3% compared to the same quarter last year. Analysts expect that Herbalife will post $5.26 EPS for the current fiscal year.

HLF Strengths

HLF’s strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance, impressive record of earnings per share growth, increase in net income and good cash flow from operations. These strengths outweigh the fact that the company has had generally high debt management risk.

These strengths include:

• The revenue growth came in higher than the industry average of 2.7%. Since the same quarter one year prior, revenues rose by 19.3%. Growth in the company's revenue appears to have helped boost the earnings per share.

• Powered by its strong earnings growth of 34.69% and other important driving factors, this stock has surged by 89.52% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, HLF should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.

• HLF has improved earnings per share by 34.7% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, HLF increased its bottom line by earning $3.95 versus $3.32 in the prior year. This year, the market expects an improvement in earnings ($5.34 versus $3.95).

• The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Personal Products industry average. The net income increased by 26.9% when compared to the same quarter one year prior, rising from $111.87 million to $141.95 million.

• Net operating cash flow has significantly increased by 58.32% to $225.53 million when compared to the same quarter last year. In addition, HLF has also vastly surpassed the industry average cash flow growth rate of -5.06%.

Hedge Fund Support

Vanguard upped its stake in Herbalife on Dec. 31. That’s a small increase from the amount reported in the firm’s regulatory filings as of Sept. 30. At that time, Vanguard held a 4.5% stake in Herbalife Ltd. with more than 4.5 million shares of the company.

The firm is one of several major investors who have taken an interest in Herbalife over the last year or so. According to Yahoo! Finance, Carl Icahn appears to be the biggest shareholder, with a nearly 17% stake. FMR, LLC is in second place, with a nearly 13% stake in Herbalife. Bill Ackman has continued to derail Herbalife’s growth efforts by continually calling it a pyramid scheme and pushing for an investigation. However, he has seen nothing but hurt since he announced his massive short of the company late in 2012.

Emerging Markets Growth To Boost Herbalife

Many analysts see emerging market growth is likely to boost Herbalife’s revenues and earnings, and eventually translate into a higher price per share. Barclays Equity Research reports, “We are also raising our EPS for FY14 to $6.27 from $5.65 and for FY15 to $7.42 from $5.65. The changes reflect faster revenue growth than our prior forecast in several Herbalife regions: Mexico, Latin America, EMEA and China.”

Analysts Opinions

Herbalife had its target price lifted by Barclays from $78.00 to $94.00 in a research note released on Tuesday 21st January. They currently have an overweight rating on the stock.

Also, Herbalife has been the subject of a number of research reports:-

• Analysts at DA Davidson reiterated a buy rating on shares of Herbalife in a research note to investors on Thursday, January 2nd. They now have a $115.00 price target on the stock.

• Separately, analysts at S&P Equity Research downgraded shares of Herbalife to a sell rating in a research note to investors on Monday, December 30th.

• Finally, analysts at Wedbush raised their price target on shares of Herbalife from $81.00 to $90.00 in a research note to investors on Friday, December 27th.

One analyst has rated the stock with a sell rating, two have assigned a hold rating and six have given a buy rating to the company. The stock presently has an average rating of Buy and an average price target of $88.79.

Analyst Firms Making Recommendations

ARGUS RESEARCH BARCLAYS CAPITA
CO FORECST DAVIDSON D A
JANNEY MONT. SUNTRUST ROBINS
WEDBUSH SECURIT

Conclusion

Herbalife's Q4 2013 results are going to create new momentum for Herbalife especially when the company manages to surprise to the upside.

Regulatory action is unlikely and with PricewaterhouseCoopers' clean audit, Ackman is as isolated as never before. It is judged that an intervention by regulators to be a very low probability event and will hold on to my Herbalife shares.

So, based on HLF’s preliminary report, expect an upbeat earnings report, and the stock to trade higher following the release.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the HLF Mar 2014 70.000 call (HLF140322C00070000) at or under $3.90, good for the day. Place a protective stop limit at $1.40 and a pre-determined sell at $6.50.



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