Herbalife - Growth & Income

Zacks Investment Research
Posted: Dec 04, 2012 12:00 AM
Herbalife Limited (HLF) has put together an impressive streak of 15 straight quarters with positive earnings surprises. Furthermore, the global nutrition company continues to generate impressive free cash flow, which it has been using for share repurchases and dividends. A healthy dividend yield of 2.7% and an expected long-term earnings growth rate of 14.9% make this Zacks #2 Rank (Buy) suitable for investors seeking both growth and income.

Strong Q3 Results and Upbeat Guidance

On October 29, Herbalife came out with third-quarter earnings of $1.04 per share, beating the Zacks Consensus Estimate by nearly 3% and the year-ago earnings by 20.0%.

Net sales climbed 14% to $895 million, due to strong sales across the globe as worldwide volumes surged 17%. All six of the company’s geographic regions experienced double-digit volume growth.

In addition to its impressive third-quarter results, the company provided an encouraging initial earnings guidance for 2013. Herbalife expects earnings between $4.40 and $4.55 per share next year, which assumes year-over-year sales growth of 10%-12%.

Earnings Estimates

Over the last 60 days, the Zacks Consensus Estimate for 2012 has increased 1.3% to $4.02 per share, implying year-over-year growth of approximately 21.5%. Moreover, the Zacks Consensus Estimate for 2013 increased 0.7% to $4.55 over the same time frame, representing a year-over-year increase of approximately 13.2%.

Constant Dividend

In the third quarter, Herbalife continued to generate strong free cash flow, which allowed it to repurchase shares worth $181.9 million. The company also paid dividends worth $32.4 million during the quarter. It currently yields a solid 2.7%.

Reasonable Valuation

Herbalife’s valuation looks reasonable. On a price-to-sales basis, shares are trading at 1.29x, which represents a huge premium to the peer group average of 0.34x. Also, on a price-to-book basis, shares are trading at 13.58x, a huge premium to the peer group average of 2.18x. Given the company’s strong fundamentals, the premium valuation is justified and well supported by its long-term estimated earnings growth rate of 14.9%, which is above the peer group average of 13.7%.

The PEG ratio of 0.75 is also attractive. The stock currently trades at a forward P/E of 11.21x, reflecting a discount compared with the peer group average of approximately 11.59x.

Furthermore, it has a trailing 12-month ROE of 102.9%, which is substantially above its peer group average of 18.6%. This implies that the company reinvests its earnings more efficiently than its peer group.

The chart below shows that the share price has been generally tracking the company’s earnings performance. Given the increasing trend of the Zacks Consensus Estimate, the share price should continue increasing. With strong earnings momentum, solid growth prospects and a shareholder-friendly management, Herbalife offers a lot of upside potential.

Herbalife, a global nutrition company headquartered in Grand Cayman, the Cayman Islands and founded in 1980, focuses on selling weight management, nutrition and personal care products to support a healthy lifestyle. The company, which has a market cap of $5.04 billion, sells its products in 85 countries. The products of the company are sold to and through a network of independent distributors.

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HERBALIFE LTD (HLF): Free Stock Analysis Report
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