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TheStreet Open House

The 5 Dumbest Things on Wall Street This Week: May 3

3. (Yet More) Herbalife Hilarity

Audits? Herbalife (HLF) don't need no stinking audits!

The embattled supplement seller celebrated its Street-beating results Monday by sticking it to its nemesis, hedge fund manager Bill Ackman. Herbalife reported revenue of $1.1 billion, a 17% increase over the prior year's quarter, topping analysts' estimate of $1.07 billion. Excluding items, Herbalife earned $1.27 a share, up from 88 cents a share in the prior year's quarter. Analysts surveyed by Yahoo! Finance were looking for earnings of $1.07 a share.

The Los Angeles-based firm, which Ackman referred to as a "pyramid scheme" when he announced his billion dollar bet against the company in December, also raised its 2013 guidance to between $4.60 and $4.80 a share. Previously, the company had forecast earnings between $4.45 and $4.65 a share. Shares of the heavily shorted stock -- almost 50% of the shares -- popped 2% Tuesday on the news.

"The proof is in the results. Ultimately people will realize that Bill Ackman's reckless bet is based on an unfounded hypothesis," Herbalife President Des Walsh told Reuters.


Easy there Des-y. We wouldn't be so quick to gloat with all that splainin' you need to do. You may believe Ackman's bet is "unfounded", but as you repeatedly remind investors in your earnings release, your financials are "unaudited" as a result of the KPMG insider trading scandal.

"As a result of the resignation of KPMG, the unaudited interim financial information presented has not been reviewed by an outside independent accounting firm," Herbalife warns three times in its earnings press release.

And while it is true that Herbalife had no role in Scott London's silly scheme to help his golfing buddy get rich (Jeez what an idiot!), it's still not the type of earnings report to crow over considering all those caveats. As much as Herbalife is using this report to go on the offensive against Ackman, we've never seen a more defensive press release.

Aside from the multiple references to its lack of accounting certification, Herbalife listed over 20 bullet-pointed warnings about its guidance in its "Forward Looking Statements" section. From the boilerplate admonition about "the competitive nature of our business" to "adverse changes in the Chinese legal system" to "pricing and currency devaluation risks, especially in countries such as Venezuela", we've never seen so many disclaimers in a single release! There's enough scary stuff there to even send Carl Icahn running away from the stock if only he didn't hate Bill Ackman so much to stay in it.

And speaking of Venezuelan currency risks (now that's something we don't say often), it's worth noting that Herbalife only earned $1.10 per share when including a hit from the devaluation of Venezuela's currency (a hefty 10 cent bottom line hit) and legal expenses related to its defense against Ackman's onslaught (an equally stiff 7 cents).

True, that still leaves Herbalife's earnings 3 cents ahead of Wall Street estimates for the quarter, yet it's equally true that Bill is not going anywhere soon, so investors can expect an Ackman adjustment in its GAAP accounting statement -- audited or unaudited -- for many quarters to come.

And as for Venezuela's hefty impact on the company's profits, well, that's just one of the twenty plus risks associated with doing business with Herbalife. Just check the bullet points.

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