Herbalife Nutrition Ltd. (NYSE: HLF) has been a contentious stock for years, after the activist investor battle that took place between Bill Ackman and Carl Icahn. That battle has since passed, but Icahn is still nearly a 24% stakeholder in the company. Now we have an independent research report that has launched Herbalife shares with a solid Buy rating.
The independent research firm Argus launched coverage with a Buy rating and a $54 price target on Thursday. The firm expects that Herbalife will benefit from increased consumer interest in overall health and fitness rather than just a focus on weight-loss products. According to Argus, Herbalife has grown its product line and can take advantage of this trend.
Another issue behind the new Buy rating is that Herbalife’s distributors have adopted new technologies for interacting with customers during the shut-in coronavirus days. Zoom meetings are one such tool. The company is also said to be using doctors to train on the safe use of Herbalife’s products, and it is using athletes and fitness experts to lead at-home workouts.
With a stronger base in mind, after its first-quarter earnings, as well as using a recovery at the consumer level, Argus raised its 2020 earnings estimate to $3.16 from $2.80 per share and raised its 2021 estimate to $3.60 from $3.30 per share.
Based on the new expectations, Argus sees Herbalife as favorably valued at just 12.4 times its 2021 targets. That is when it expects a recovery in earnings, and it is still cheap to historical valuations.
When Herbalife reported its most recent earnings at the start of May, the company said that revenues rose by 8% from the prior year to $1.3 billion. That may have been in line with expectations, but its gross margin rose to 80.6% from 79.4%. The company’s operating margin fell to 7.5% from 13.9%, but Herbalife showed that this was primarily driven by a significant increase in its selling, general and administrative expenses. Adjusted earnings at the time of $0.83 per share compared with $0.66 a year earlier and the $0.61 consensus estimate.
For fiscal 2019, revenue declined by well under 1% to $4.9 billion, as operating earnings fell to $2.82 per share from $2.88.
With John Agwunobi having taken over as chief executive earlier in 2020, Argus believes that Herbalife’s prospects are not reflected in its model for accelerated revenue and earnings growth ahead.
Interestingly enough, while the Argus target is handily higher than Wednesday’s close, and even considering the rally on Thursday, the Argus price target of $54 is actually under the Refinitiv consensus price target of $57.67.
Herbalife Nutrition shares closed at $44.96 on Wednesday, but they were up almost 5% at $47.15 on Thursday in midday trading. The 52-week trading range is $20.73 to $48.82.