Herbalife Shaping Up to Be a Healthy Value

After 19 quarters of double-digit growth, Herbalife (HLF - commentary - Cramer's Take) disappointed investors last November the way so many other firms have in this ugly recession. While third-quarter results met expectations, the firm reduced guidance for the coming year enough to put an end to the string of positive quarterly comparisons.

Herbalife sells nutritional supplements, weight-management and personal care products worldwide through a multilevel marketing structure. About 80% of its sales are generated outside the U.S.

Sales in Herbalife's fourth quarter are now expected to decline by at least 5%. Earnings per share could be as low as 65 cents. That's down from estimates three months ago of 92 cents and would represent an 18% year-over-year decline.

Revenue is now only expected to be flat in 2009, and earnings-per-share expectations for next year have fallen 24% since this summer, to $3.24, which would represent a single-digit percentage decline from 2008. Management actually expects worse, guiding for EPS next year of only $3 to $3.20.

Thus does a growth story end. And, as is typical in these scenarios, Herbalife's shares tumbled much more than the percentage decline of its EPS expectations. From a peak of nearly $50 earlier this year, the stock fell over 70%, hitting a nadir of $14.47 in late November. When growth-stock investors abandon a name, the premium multiple that was once afforded the stock also departs.

Besides seeing reduced demand caused by the growing global inflation, Herbalife's mainly non-U.S. revenue was also hit by the negative translation effects of a strengthening dollar. The one-two punch has overwhelmed, for the time being, the larger positive trend of aging and wealthier populations consuming more nutritional supplements and trying to lead healthier lifestyles.

But insiders helped fill the void left by fleeing growth investors. Eight executives and directors purchased over $2.1 million worth of HLF during November, for between $15 and $19.96 per share. Six in this buying cluster were last seen smartly selling shares at above $40. This many insiders reversing sentiment at one time adds bullishness to the firm's insider profile.

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At the time of publication, Moreland was long HLF, although holdings can change at any time. Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights, founder of the Web site InsiderInsights.com and the director of research at Insider Asset Management LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland appreciates your feedback; click here to send him an email.