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Published: June 30, 2010
Here's a weight-loss product that helps
slim bulging waistlines but can fatten your trading portfolio.
Herbalife (NYSE: HLF) is a leading weight management
company that sells diet shakes, snacks and nutritional
supplements.
Nearly two-thirds of Americans currently battle obesity, and the
demand for weight-loss products is growing. From 2009 to 2010,
the global weight loss product market is expected to increase
sales +19%, to more than $69 billion.
It's not just Americans who are trying to slim down. The World
Health Organization estimates that about a third of all adults
(age 14 and up) that compromise the total world population of
6.8 billion people are overweight. That means the potential
market for HLF's products is roughly 1.4 billion people. In five
years, the number of overweight adults is expected to increase
to 2.3 billion, a growth of almost +65%.
For Herbalife, the worldwide obesity epidemic adds up to
potentially large profits. The global network marketing company
sells its products in 72 countries through a worldwide network
of 1.9 million independent distributors.
Technically, Herbalife is appealing. The stock has been in a
steady uptrend since March 2009.
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In March 2010, HLF broke
its major downtrend line
that had been forming
for more than two years,
since March 2008.
And just last week the
stock bullishly broke
out of a second
ascending triangle
formation. This pattern
was created by the major
uptrend line from March
2009 and long-term,
historical resistance
near $48.
The stock is now again
approaching its all-time
high of $52.78, which it
hit in early May 2010,
after strong
first-quarter results.
If HLF can pierce its
upper Bollinger band,
currently intersecting
at $50.77, it is likely
to reach its May peak
and could go much
higher.
Based on the
measuring principle
-- which is calculated
by adding the height of
the triangle to its
break-out level --
Herbalife could
eventually reach a
target of roughly $71
($48 - $25 = $23; $23 +
$48 = $71).
The stock is above both
the rising 10- and
30-week moving averages.
The 10-week moving
average acts as an
initial base of support
and intersects at
$46.75. The 30-week
moving average, which
intersects at $43.56, is
just above a key support
level, dating back to
March 2008.
The indicators are
mostly bullish.
MACD appears to be
on the verge of giving a
buy signal. The MACD
histogram is ascending
toward positive
territory.
The
relative strength index
(RSI) has been in a
major uptrend since
December 2008. At 59.5,
it is not highly yet
overbought.
Stochastics has just
given a buy signal and
confirms that the stock
is not overbought.
With growing worldwide
demand for its
weight-loss products,
Herbalife shows strong
future revenue and
earnings growth
potential.
On May 4, the company
reported upbeat
first-quarter 2010
results. Revenue for the
period increased +18.6%
to $618.6 million,
compared with $521.7
million in the year-ago
quarter. Higher sales
volumes in the United
States, particularly
within the Hispanic
market, drove growth.
For the upcoming
second-quarter, to be
reported on August 2,
revenue is expected to
increase +12.7% to
$644.7 million, compared
with $571.8 million in
same period a year ago.
For the full 2010 year, the eight analysts who follow the
company believe revenue will increase +11.2% to $2.6 billion,
compared with $2.3 billion in the 2009 year.
By 2011, as demand for weight loss products continues to
increase, revenue should grow an additional +6.5% to $2.8
billion.
Earnings growth is equally as robust. In the first-quarter of
2010, earnings increased +44% to $0.98 per share, compared with
$0.68 in the first-quarter of 2009.
For the upcoming second-quarter, the company has issued upbeat
earnings guidance of $0.89-$0.92 per share. This represents at
least an +8% increase compared with the year-ago quarter.
For the full 2010 year, Herbalife has raised its earnings
guidance to $3.80 - $3.90 per share. Management initially
expected to post earnings between $3.58 - $3.70 per share. This
updated estimate represents at least a +6.5% gain compared with
the year-ago period. Increased sales, especially in the Asian
and North American markets, are driving expected growth.
By 2011, analysts expect the company will achieve +18% earnings
growth, with net profit per share reaching $4.37.
Despite strong growth projections, the company remains
attractively valued. Herbalife has a trailing
price-to-earnings ratio (P/E) of 14.2.
With this P/E, the company's price/earnings-to-growth ratio
(PEG) (P/E divided by growth rate) is 0.75 (14.2/18.9). Any
number under one is considered good value.
HLF's
return on equity (ROE) is an incredible 66.3%. In
comparison, the S&P's ROE is 15.0%.
The company also pays a yearly dividend of $0.80 per share. At
current prices the company pays a small
dividend of 1.7%.
As further evidence of the company's financial health, Herbalife
recently announced a $700 million expansion to its $300 million
share repurchase program. By 2014, the company plans to
repurchase $1 billion of its shares. It has so far repurchased
$100 million in shares. The share repurchase program should also
help support the share price.
Action to Take --> Given the
company's financial health, attractive valuation, strong growth
outlook and positive technicals, I believe Herbalife is well
positioned to go higher.
I gave Trade of the Week readers, the free weekly trading letter
I co-write with trading expert Mike Turner, a heads-up on
Herbalife before the market opened this week. I set my target at
$62.95, although according to the measuring principle, the
shares may go higher. To get further details on the trade and
receive our free analysis each week, you can
go here to sign up.
-- Melvin Pasternak
Editor,
Double-Digit Trading
Co-Editor,
Trade of the Week |
