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Why Herbalife Is Crashing After Hours In Two Charts

Tyler Durden's picture




 

While one can relish the recent record surge in Herbalife stock on the day in which Bill Ackman was supposed to bury the stock, instead sending it up by the highest intraday gain in history, the reality is that Herbalife - just as we warned last quarter - continues to send out flashing red alerts, and nowhere more so than in the numbers which were just reported.

No, it wasn't the Q2 revenue or the EPS which mattered: those are so doctored they are completely irrelevant to the cash burn/stock buyback story at hand story. The only thing that matters is what we noted last quarter: how much cash does the company generate organically, how much it generates through debt issuance, and how much is spent on stock buybacks.

The answers:

  • in Q2 HLF reported $157 million in cash from operations. This was the lowest cash creation by Herbalife since Q2 2013, and is the third consecutive quarter of decline.
  • In Q2 HLF did not raise any new debt but it more than made up for that with the $1.15 billion convertible offering in Q1, virtually all of whose net proceeds were used to buyback stock.
  • In Q2 HLF repurchased $581 million in stock. This brings the total amount repurchased in 2014 to a record $1.3 billion (compared to a paltry $166 million in the 2013 comparable period). And the year is only half way done!

And here are the two most important charts which explain why the stock is crashing over 11% after hours. 

 

First, Herbalife cash from operations and stock buybacks. The party may be ending:

 

And the real reason why the party may be ending is that HFL's net debt has exploded in the past year by over $1 billion. In other words, all the company's cash creation and all of its debt issuance in 2014 has gone exclusively toward buying back its stock.

At this rate quite soon HLF will have no additional debt capacity for futher buybacks. Worse, even if its were to use all its organic cash to repurchase stock it will be nowhere near enough to match what buybacks have been in the past year, which some may argue is the only reason why the stock has stay afloat at its current levels.

So, is Ackman going to have the last laugh? Or will Ichan end up LBOing the company - even if at a huge ultimate loss - just to spite the fellow hedge fund manager with whom he has supposedly kissed and made up? We will find out soon, because if Herbalife is to be LBOed, Icahn knows that the window in which bond investors are willing to take a gamble on this melting icecube is closing fast.

 

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Mon, 07/28/2014 - 17:19 | 5014584 Squid Viscous
Squid Viscous's picture

looks like a reverse of I-con's EKG

Mon, 07/28/2014 - 17:20 | 5014587 Keltner Channel Surf
Keltner Channel Surf's picture

A miss on earnings is proof positive of a pyramid scheme worthy of the Egyptians.  For a viable enterprise, any Viagra-snorting CFO worth his salt pillars could have engineered an after-hours pop.  If the firm was legitimate, Carl “Icon” could have nullified any plunge with a 3:58 tweet.  Clearly smoke ‘n’ mirrors . . .

Mon, 07/28/2014 - 17:25 | 5014605 Squid Viscous
Squid Viscous's picture

agreed, what does your T.A. say about HLF... just kidding, let's bury the hatchet?

Mon, 07/28/2014 - 17:27 | 5014618 Keltner Channel Surf
Keltner Channel Surf's picture

Fine, I prefer to slice my calamari across the grain ... :)

Mon, 07/28/2014 - 17:35 | 5014648 I am more equal...
I am more equal than others's picture

 

 

 

Hey, hey hey....

I'm a double diamond direct distributor. 

Become a bizillionaire by selling high profit supplements. 

You customer will feel great. 

You will make money. 

Evenyone wins. 

Call me at 800-328-7447

That is 800-EAT-SHIT

 

Mon, 07/28/2014 - 19:19 | 5015061 ebworthen
ebworthen's picture

Yup, and if consumers are tapped out pricey supplements are the first things to go.

Mon, 07/28/2014 - 20:57 | 5015355 Four chan
Four chan's picture

the sails have cannon ball holes and the ship is listing. lets watch the institutional rats scurry.

Mon, 07/28/2014 - 17:39 | 5014676 Squid Viscous
Squid Viscous's picture

no way - do you really eat that stuff? I use it for bait to catch something worthy of my table...

Mon, 07/28/2014 - 17:30 | 5014639 FuzzyDunlop21
FuzzyDunlop21's picture

It was an amusing exchange. I enjoyed reading it

Mon, 07/28/2014 - 17:42 | 5014689 Kirk2NCC1701
Kirk2NCC1701's picture

Did Herbalife get... "Herbacided"?

And when will Ackman get Herbacided?

Mon, 07/28/2014 - 17:20 | 5014585 NidStyles
NidStyles's picture

Do these companies actually think stock buy backs will save them?

Mon, 07/28/2014 - 17:22 | 5014596 NotApplicable
NotApplicable's picture

When it's done via a convertible offering, I can't imagine there's much thinking involved.

How could anyone even do that with a straight face?

Mon, 07/28/2014 - 17:24 | 5014604 NidStyles
NidStyles's picture

The only way this makes sense to me is if there is going to be a debt reconsilidation in the western economies...

Mon, 07/28/2014 - 17:24 | 5014608 NotApplicable
NotApplicable's picture

Or they hired Corzine.

Mon, 07/28/2014 - 18:27 | 5014872 Almost Solvent
Almost Solvent's picture

Or they don't give a fuck and need to make bonus so they can keep up the $799/month Benz & $5,000/month mortgage & $2,000/month private school tuition (plus day to day utilities, gas, food, clothing, insurance, child support). 

 

Once you realize those that have to fake it to hope to make it, financial BS we see makes sense. 

Mon, 07/28/2014 - 17:31 | 5014644 Spitzer
Spitzer's picture

I think in 1928 they kinda thought there was some black magic here. But times have changed. We all know it's a joke.

Mon, 07/28/2014 - 17:27 | 5014621 TahoeBilly2012
TahoeBilly2012's picture

Really nothing wrong with Multie Level Marketing if you just pay a commission out to customers who bring in new customers, it's really not unethical or even a bad idea. The problem is the sales program becomes all hype and over priced products and in this case a company run on ponzi finance.

Mon, 07/28/2014 - 18:32 | 5014898 Almost Solvent
Almost Solvent's picture

pay a commission out to customers who bring in new customers

 

I did not have sexual relations with that woman

 

I am not a crook

 

Peace in our time

 

(IF recruiting others is required to 'make it' then a kickback to the next guy in line still does not make a legitimate enterprise. It only speeds up the failure. See Amway, er Quixstar, er Powerhour.)

 


Mon, 07/28/2014 - 17:29 | 5014629 oddjob
oddjob's picture

No, it just provides liquidity for insiders to sell into.

Mon, 07/28/2014 - 17:27 | 5014593 syntaxterror
syntaxterror's picture

Even though Ackman is doing God's work, there ain't nothing wrong with a good 'ole fashioned ponzi scheme... 

Mon, 07/28/2014 - 17:30 | 5014636 Al Huxley
Al Huxley's picture

I didn't think there was even anything OTHER THAN a good 'ole fashioned ponzi scheme these days.

Mon, 07/28/2014 - 17:26 | 5014614 Wannabee
Wannabee's picture

I don't believe I have ever seen a HLF product... Am I living under a rock? Is this something people use???

Serious question, no sarc

Mon, 07/28/2014 - 17:27 | 5014619 NotApplicable
NotApplicable's picture

Think Amway.

Mon, 07/28/2014 - 17:28 | 5014627 TahoeBilly2012
TahoeBilly2012's picture

Herbal Amway

Mon, 07/28/2014 - 17:28 | 5014626 syntaxterror
syntaxterror's picture

I guess most people dose up with HLF products inside their homes. The NSA can probably give you the numbers.

Mon, 07/28/2014 - 17:31 | 5014646 Rainman
Rainman's picture

I think I got one during a proctological exam.

Tue, 07/29/2014 - 00:13 | 5016224 Bernankenstein
Bernankenstein's picture

I think McD's uses it in their now awful milkshakes.

Mon, 07/28/2014 - 17:27 | 5014617 taraxias
taraxias's picture

Is this mean I should buy with both fists? ///sarc

Mon, 07/28/2014 - 17:28 | 5014622 The Phallic Crusader
The Phallic Crusader's picture

Hey look - you want good, quality Tiger Penis, you're gonna have to pay for it, you know?

Herbalife - for life.

Mon, 07/28/2014 - 18:08 | 5014795 SheepDog-One
SheepDog-One's picture

Human horn like Lurr buys.

Mon, 07/28/2014 - 17:27 | 5014623 buzzsaw99
buzzsaw99's picture

i-con always goes for the cash. quick and dirty debt fueled cash, because he cares so much about the companies he loots.

Mon, 07/28/2014 - 17:42 | 5014654 kchrisc
kchrisc's picture

Seems the poor may now be too poor even for Herbalife's scam.

Mon, 07/28/2014 - 17:34 | 5014660 Big Ben
Big Ben's picture

I wouldn't touch this stock with a ten-foot pole. Which probably means it's about to double...

Mon, 07/28/2014 - 17:37 | 5014669 homiegot
homiegot's picture

Maybe it's because their poducts are a scam?

Mon, 07/28/2014 - 17:40 | 5014684 Kirk2NCC1701
Kirk2NCC1701's picture

Don't own their stock, nor use their products.  Nor does anyone of the hundreds of smart, educated people I know.  If they do, they don't talk about it.

There's a moral in there somewhere, I think.

Mon, 07/28/2014 - 17:49 | 5014717 orangegeek
orangegeek's picture

avoid these types of stocks - gamed by insiders

Mon, 07/28/2014 - 17:54 | 5014740 Notsobadwlad
Notsobadwlad's picture

A long time ago I went to Wharton for a week-long financial class with a bunch of other company execs.

Back then CFROI was in vogue and they taught students that companies such as Marriott, which was highly leveraged (for the time), was bad because even though it had high returns on its asset base, it incurred excessive risk and earnings would be very volatile, depending on interest rates and business conditions.

I wonder what the pinnacle of financial business schools is teaching today.

Mon, 07/28/2014 - 17:56 | 5014745 Comte d'herblay
Comte d'herblay's picture

Who is lending money, over a billion dollars!!! to them???

And what collateral if any has HLF put up to obtain it, and at what interest rate?

And who handled the credit arrangements?? 

Joe Cassano?  Dick Fuld?  Bernie from his cell?  Ivan Boesky?  Michael Milken?  J Yell?

 

Mon, 07/28/2014 - 23:09 | 5015977 novictim
novictim's picture

If China can get it then HLF might as well too.

Mon, 07/28/2014 - 18:24 | 5014865 Duffminster
Duffminster's picture

The high yield corporate bond market may be the best indicator that a substantial market correction has a higher probability of occuring near term than any other indicator except perhaps the “Cook Cumulative Tick,”, which looks at the relation between the NYSE Tick and US stock prices. Keep in mind that a lot of the high yield corporate bond issuances have been used by companies to make huge stock buybacks and issue dividends.  I've put together a few articles on the Bond market for those also looking at how to assess market risk at this time.

"Mile wide, inch deep
Bond market liquidity dries up"
https://marketwatch.creatavist.com/story/7571

"...The cushion protecting fixed-income investors from market shocks, particularly in the $6.6 trillion corporate bond market, is melting, which is creating a new form of risk when it comes to buying these securities. In response, investors are reevaluating how they hold bonds sold by companies from Apple Inc. to Ford Motor Co. to DreamWorks Animation, as well as reshaping how they interact in the secondary trading market. The changes have served as a key factor eroding the traditional conviction that the bond market shields investors from risk...."

"...The combination of smaller holdings by dealers and a surge in the amount of outstanding corporate debt suggests that there’s more inventory to change hands with fewer institutions willing to facilitate those transactions. Whereas dealers once held about 4% of all outstanding corporate debt on their balance sheets, they now hold closer to 0.5%, according to Oliver Randall, a professor of finance at Emory University, who has done research on corporate bond market liquidity ..."

"...The smaller amount that dealers hold on their books means they can’t unconditionally buy bonds that investors are trying to sell, especially in large blocks. But there’s another issue at play: the low interest-rate environment that characterized much of the post-crisis economy has brought many new issuers into the market. New corporate bond sales have surged as issuers rushed to take advantage of still attractive rates and investors sought the relatively higher income of corporate debt...."

And a whole lot of the money was raised to do share buybacks and issue dividends.

"Stock trader who called three crashes sees 20% collapse" - “Cook Cumulative Tick,” - flashing warning
http://www.marketwatch.com/story/stock-trader-who-called-three-crashes-s...

"Code Red In High Yield" - Forbes - Steve Blumenthal
http://www.forbes.com/sites/greatspeculations/2014/07/25/code-red-in-hig...
"In my 20 years of managing high yield bond investments, I’ve never seen so many signals that scream caution. Desperate to find yield, investors have poured billions into high yield bond funds and ETFs driving the yield on the Barclays High Yield Bond Index to just 5.54% — the lowest level in history. Investors are positioning in a risk they may not fully understand...."

"Fridson: High Yield Bonds 'Extremely Overvalued' For Nine Months, A New Record"
http://www.forbes.com/sites/spleverage/2014/07/22/fridson-high-yield-bon...
"...According to high yield bond market guru Marty Fridson, U.S. high yield bonds have been “extremely overvalued” for nine consecutive months, the longest such streak ever..."
"...the overvaluation is not isolated in the bottom tier of credits, says Fridson, “contrary to the representations of those who hope to keep attracting capital to the asset class.”

Mon, 07/28/2014 - 18:34 | 5014893 mastersnark
mastersnark's picture

A company that makes so much cash it can afford to buy its own stock is at least three times as healthy as a company that wastes money on growing revenues, r&d or capex.

Mon, 07/28/2014 - 18:36 | 5014912 ptolemy_newit
ptolemy_newit's picture

Good cop / bad cop?

Seems like they are both making money as they pump then dump while leaving the retail behind the HFT!

 

Stay clear of this targeted (legal) manipulated pyramid.

What a laugh they must be having

Mon, 07/28/2014 - 18:55 | 5014990 teslaberry
teslaberry's picture

please....call me when the short squeeze comes. 

 

enron went on for longer than herbal life. and herbal life can go on a lot longer. 

 

Mon, 07/28/2014 - 20:13 | 5015205 hedgiex
hedgiex's picture

This article gets it. It has been so much an unsophisticated financial play that it could not have missed Ackman and others. When you see such smoke, you ignore the sales forecasts and dig deep into what had been sold and the sustainability of the products. This is no "Apple" in their industry. This could not have fooled Icahn and guess he got caught wrong footed on this one.

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