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Herbalife Scores a Hat Trick Against Bill Ackman

Stocks in this article: HLF

NEW YORK (TheStreet) -- Herbalife (HLF) delivered a hat trick against Bill Ackman's Pershing Square hedge fund on Monday. The network marketing company reported a significant beat on the top and bottom lines, raised guidance, and canceled its dividend in order to increase buybacks. The company stuck it to short sellers Monday:

  • First quarter worldwide volume growth of 9% compared to the prior year period.
  • Adjusted EPS of $1.50 increased 18% as compared to the same period in the prior year. Reported EPS of $0.74 primarily reflects a foreign exchange loss for Venezuela and other items.
  • Raised FY14 adjusted diluted EPS guidance to a range of $6.10 to $6.30.
  • Generated $191 million in operating cash flow in first quarter 2014.
  • Board of Directors takes steps to accelerate cash returns to shareholders, terminates dividend and determines to utilize cash instead to repurchase stock during the second quarter.

For short sellers, it was a worst case earnings report scenario come true. The company reported first-quarter non-GAAP record earnings of $1.50 per share versus the consensus estimate of $1.30 per share.

Revenue was 12% higher than the comparable period last year at $1.3 billion compared to $1.26 billion estimated. At the same time, product inventory level fell from $351 million to $325 million. Short sellers hoping the company would have trouble moving inventory has their hopes crushed quickly.

A beat and a raise. Jim Cramer writes about why a "beat and a raise" is incredibly bullish for a stock in his new book, Get Rich Carefully. Granted, Herbalife is a unique situation that requires an even more careful analysis to determine if it's appropriate for your portfolio, but the theory is the same.

The real kick in the pants for short sellers, particularly shorts that own put options, is the suspension of dividend payments. Unsurprisingly, suspending the dividend appears to be tailor made to put a hurt on Bill Ackman and Pershing Square. If you're not an options trader, you can be forgiven for not understanding the dynamics behind the decision, but I will explain why this is devastating for put owners and beneficial for call owners.

In order to avoid a short squeeze, Ackman reportedly covered a large proportion of his short position and bought put options to create what's known as a synthetic short. Because put options give the owner the right (but not the obligation) to sell (or put) a stock to the seller at a set price over a set period of time, they have an inverse relationship with the stock price.

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