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 [5]- 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.
[6]
First, Herbalife cash from operations and stock buybacks. The party may be ending:
[7]
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.
[8]
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.
