This Is The Devastation That Follows When Stock Buybacks Grind To A Halt (Hint: Herbalife)

Moments ago Herbalife reported earnings that were abysmal. In a nutshell, the company not only missed the top and bottom line:

  • HERBALIFE REPORTS 3Q ADJ. EPS $1.45, EST. $1.51
  • HERBALIFE 3Q NET SALES $1.26B,  EST. 1.31BN

But also slashed guidance:

  • HERBALIFE SEES YR ADJ EPS $5.80- $5.90, EST. $6.26, SAW $6.17-$6.32
  • HERBALIFE SEES 4Q SALES DOWN 5%-DOWN 8%, EST. UP 8%
  • HERBALIFE SEES YR NET SALES UP 3.5%-4.3%, SAW UP 8.5%-10.5%

Why? Precisely the reason why we warned last quarter that Herbalife, which may or may not be a Ponzi, is now nothing but a "melting icecube":

... 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.

And sure enough, this is perhaps the most important chart explaining Herbalife's absolutely abysmal numbers. In Q3 of this year, Herbalife repurchased less than $1 million in stock after relentlessly loading up in the first two quarters thank to a massive debt-funded buyback spree, just as we warned would happen.

 

The reason: Herbalife's the net debt is, just as expected, suddenly too damn high, because even with zero buybacks, HLF net debt rose yet again to a new all time high.

 

Worst of all, this is happening just as Herbalife's cash from operations are also about to grind to a halt, and in Q3 were the lowest in years! In fact, should the decline continue at this pace, we assume HLF will file for bankruptcy within 12-18 months, regardless of whether it is found to be a pyramid scheme or not.

 

The conclusion? Same as last quarter:

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.

And this is what just happened after hours as the endgame was finally revealed:

 

Upcoming bankruptcy (or LBO) of Herbalife aside, the bigger lesson here is that this company is merely a case study of what will soon happen to all those other thousands of companies which took the easy way out to satisfy activist shareholders, loaded up on debt, bought back a ton of stock, and suddenly find themselves hitting an iceberg, dragged down by a few thousand tons of debt steel, and without a single life boat in sight.