Buyout Bid Juices Herbalife

Such an announcement would undoubtedly bolster Herbalife's addressable market and increase the value of the company. For comparative purposes, shares of Nu Skin Enterprises (NUS Quote) rose 17% the week that the company announced it had received approval to begin network marketing in China.

In addition, the $38-a-share bid implies an 8% discount to Nu Skin based upon expected 2007 earnings before interest, taxes, depreciation and amortization, or EBITDA, even though Herbalife is increasing sales faster. Combining this data with the fact that the China catalyst has not yet hit Herbalife's shares (but has already boosted Nu Skin's), we believe the bid is not as high as it could have been. The market seems to agree, implied by Herbalife's rally above the offer price early Monday morning.

We are moving Herbalife to a Two rating (a stock that should not be bought at its current level) as the stock is already pricing in expectations of a bid above $38. In addition, today's rally has brought the position up to about 8% of the model portfolio.

We noted in a prior Alert that we planned to trim the position ahead of the company's fourth- quarter earnings release Feb. 26 because we believe the company could cut its 2007 earnings outlook. So we want to take advantage of today's price action to reduce this position. This sale will leave us with a 5% position to participate in any further upside.