Herbalife Stock (HLF): The Short Case Keeps Looking Better and Better

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Shares of Herbalife Ltd. (NYSE:HLF) were down more than 9% late Friday after reporting 2014 fourth-quarter earnings and full-year results.

You can probably guess how this report went.

hlf herbalife stockThe earnings numbers themselves were actually fine. For the quarter, HLF brought in $1.21 per share, up from the $1.15 per share it posted in the prior year. Adjusted earnings were $1.41 per share, well above Wall Street’s estimate of $1.22.

Profits were really the only bright spot in the report, though.

Herbalife revenues of $1.13 billion came in below the $1.16 billion bar set by Wall Street, and 11% lower year-over-year. Management blamed the strong dollar — a recurring theme across U.S. business — for the decline in sales.

For the full year, net income declined from $4.91 per share to $3.40 per share, and while revenues did improve, it was just a slight 2.6% increase to $4.95 billion.

Also helping paint a negative picture of HLF:

  • Interest expense jumped from $18.6 million in 2013 to $79.2 million in 2014.
  • Selling, general and administrative expenses grew from $1629.1 million in 2013 to $1,991.1 million in 2014.
  • Income before taxes fell 41.2% from 2013 to 2014.
  • Net income fell from $527.5 million to $308.7 million, a 41.5% drop.
  • Total working capital fell from $720.8 million in 2013 to $518.6 million in 2014.
  • Cash and cash equivalents fell from $973 million in 2013 to $645.5 million in 2014.
  • Total debt has been rapidly growing; at the end of 2010 it sat at $178.2 million, 2011 at $203.6 million, 2012 it was $487.6 million, 2013 at $931.3 million and now at the end of 2014 it has grown to $1.81 billion.

The debt might be the most worrying factor. While debt has increased, assets have not. Other than inventories, which rose just slightly higher from $351.2 million in 2013 to $377.7 million in 2014, all other asset categories’ fell, causing total assets to move lower from 2013 to 2014, $2.47 billion down to $2.37 billion.

In short, increasing debt while watching assets shrink isn’t sustainable. Plus, as an investor, I would be concerned about interest payments; interest expense clearly chewed into net income in 2014, and since debt only grew during the year, it’s likely going to take an even larger bite in 2015.

So … where’s the money going?

Back to shareholders in the form of buybacks to help prop up Herablife stock. In 2014, Herbalife repurchased 19.7 million shares of HLF on the open market at a cost of $1.26 billion, or an average of $64.25 per share. This was after HLF repurchased 6.1 million shares in 2013 at an average price of $49.08 per share.

This is a perfect example of destruction of shareholder value. Herbalife stock is trading at $31.50 per share today, so HLF was essentially lighting money on fire by purchasing overpriced stock across 2014 while financing it with billions of dollars in debt.

HLF might not be a Ponzi scheme as Bill Ackman claims it to be, but his call to short Herbalife stock looks better and better each quarter.

As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/02/herbalife-stock-shorting-hlf/.

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