Evaluating Herbalife Ltd.: From Historical Trends to Current Challenges

Herbalife Ltd. (NYSE: HLF) has been a subject of intrigue amid a backdrop of controversies, regulatory fines, management shifts, and the dynamic interplay between prominent investors like Ackman and Icahn. This analysis focuses on the evolution of the author’s stance on Herbalife, transitioning from bearish sentiments in 2017-2018 to a neutral standpoint around a $6 billion valuation and eventually turning bullish at $5 billion by early 2022.

Key Historical Observations:

1. Enterprise Value Trends: The author’s evaluations were influenced by Herbalife’s enterprise value, which fluctuated between $6 billion to $9 billion in 2017-2018. Shifting to a neutral and bullish stance was prompted by changes in the enterprise value, aligning with perceived shifts in the company’s prospects.
2. Free Cash Flow and COVID Performance: The historical context notes that Herbalife historically generated over $400 million in free cash flow. During the COVID-19 period, the business demonstrated resilience, maintaining sales growth, and yielding positive free cash flow.

Strategic Shift and Subsequent Developments:

1. Management Change – Michael Johnson: A pivotal event was the appointment of Michael Johnson as CEO on Dec. 27, 2022. Johnson’s track record includes quadrupling sales and expanding global operations.
2. Sales and Earnings Guidance Cut (May 2022): The author’s decision to sell in May 2022 proved prescient as management revised down sales and EPS guidance. Subsequently, the stock experienced a 44% decline.

Current Challenges and Trends:

1. Sales Performance: Despite historical strengths, Herbalife’s sales have trended downwards, dropping from a peak of $6 billion to $5 billion. Volume points for Q3 2023 were down 11%, indicating a decline, albeit with a quarter-over-quarter improvement.
2. Price Increases and Margin Pressures: Herbalife implemented significant price increases (6.3%) to counteract falling volumes and inflationary cost pressures. However, gross margins and EBIT margins faced pressures, with EBIT margins dropping to 8.2% in 2023.
3. Valuation Considerations: The author emphasized the stock’s unattractiveness with an annualized FCF of $173 million, resulting in an EV/FCF of 20x. The enterprise value is noted to be the cheapest since 2010, but concerns are raised about collapsed operating income and a total net debt of about $2 billion.

Conclusion and Future Considerations:

1. Valuation Thresholds: The author suggests potential interest in Herbalife if either free cash flow reverts to historical levels or if the stock further declines.
2. Risk and Stability: While acknowledging the stability attributed to Michael Johnson’s leadership, the author expresses reservations about anchoring the investment thesis solely on one individual.
3. Final Stance: The analysis concludes with the author’s current lack of interest in owning Herbalife shares, emphasizing the need for changed circumstances or a more substantial stock decline before considering accumulation.