Dan Loeb: "Herbalife’s Shares Are Worth $55-$68" Or Even "Well Above"
Update: this is just getting better and better: flashing headlines that the SEC has opened an inquiry into Herbalife. Dow Jones adds that inquiry may not result in action. Stock slides on the news, however following speculation that the SEC may (or rather should) be investigating the various massive puts in HLF stock before the Ackman presentation in mid-December, it bounces. Total chaos, and all very exciting.
One guy (whose positive P&L in 2012 was primarily thanks to the gap lower in HLF in the last two weeks of 2012, since filled entirely and then some), says $0. Another guy, whose nearly $10 billion hedge fund was up 30% in 2012, says over $60. Whom do you trust? As far as we are concerned, the second Tilson goes long, we dump everything.
From Loeb's letter:
The pyramid scheme is a serious accusation that we have studied closely with our advisors. We do not believe it has merit. The short thesis rests on the notion that the FTC has been asleep at the switch, missed a massive fraud for over three decades, and will shortly awaken (at the behest of hedge fund short seller) to shut down the Company. We find this thesis to be preposterous, particularly since the FTC has been sensitive to frauds of this kind. Since 1997, the FTC has brought 13 separate cases against alleged pyramid schemes.
While the short seller’s presentation was lengthy, it presented no evidence to show that Herbalife has crossed a line that would compel regulators to shut it down. Indeed, there was very little “new” news in the presentation and when pressed in later interviews, even the short seller conceded that the FTC was not looking at Herbalife’s practices. In our experience, expert regulators like those at the FTC do not respond to sudden pressure from hedge fund whistleblowers by acceding blindly to their demands. Finally, even if there were some regulatory intervention that changed how the company does business, we are comforted by the fact that 80% of Herbalife’s revenues come from overseas.
If management were to deploy its existing $950 million buyback authorization in the $40-45 range (only taking leverage to approximately 1.5x), we estimate that run-rate EPS for 2013 could be $5.50-5.70 using the reduced share count. Applying a modest 10-12x earnings multiple suggests Herbalife’s shares are worth $55-$68, offering 40-70% upside from here and making the company a compelling long investment for Third Point. Given that the Company has historically traded more in the 12-14x range (and traded at 16-20x earnings through much of 2011 and early 2012), the opportunity for the Company to tell its side of the story tomorrow at its Analyst Day in New York, and the significant short interest, we believe shares could even trade well above our current price target.
So.... who is short and sweating profusely? These guys:
Fulll Loeb letter:
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