Herbalife Investors Can Look to China for a Break from Bad News

BEIJING (TheStreet) -- The city of Nanjing, China, is giving Herbalife (HLF) investors good reason to stay positive despite the company's ugly dispute with hedge fund manager and investor activist Bill Ackman.

The city government Tuesday announced a deal with Herbalife paving the way for the U.S. company to build "a leading, global scale production base" at the Nanjing Jiangning High-Tech Industrial Park.

Terms were not disclosed, and Herbalife did not make an announcement. But the government's Web site said the plant will be "heavily invested" and should open in late 2015.

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The industrial park is already home to Honeywell (HON), Emerson (EMR), ThyssenKrupp (TYEKF) and other western company factories.

China is a fast-growing market for the global nutritional supplements supplier. Speaking to analysts recently, Herbalife officials said they now sell products in most of China's provinces and major cities. They've also used China to pilot a "preferred customer" program that's attracted more 200,000 members and could go global.

Herbalife currently has two China plants: One in Suzhou, which is near Shanghai and less than three hours from Nanjing, and in the southern city of Changsha. The latter is near farming areas and was called a "global raw materials" supplier for Herbalife by local government officials when company executives formally opened the plant in 2012.

Herbalife has been methodically building a China marketing network since 2005. It's also working with government health agencies on healthy lifestyle campaigns. For example, the company in July opened a public fitness education center in Shanghai. And Herbalife keeps in touch with China's urban middle class via postings on Sina Weibo.

The Yangtze Evening Post, a Nanjing newspaper, said Tuesday that Herbalife is expanding at the right time for China given the country's growing problem with obesity, which it said rivals America's problem. An executive for Herbalife's China division told the National Business Daily the company looked at eight other cities before choosing Nanjing for the new factory, and that more plants may be built in the future.

Back in the U.S., Herbalife's business model has been attacked by Ackman as an alleged pyramid scheme and probed by the Securities and Exchange Commission. The dispute has been mainly ignored by China's business media.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates HERBALIFE LTD as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate HERBALIFE LTD (HLF) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, good cash flow from operations, expanding profit margins and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 0.2%. Since the same quarter one year prior, revenues rose by 12.4%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Personal Products industry and the overall market, HERBALIFE LTD's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • Net operating cash flow has increased to $190.65 million or 38.52% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 10.96%.
  • The gross profit margin for HERBALIFE LTD is rather high; currently it is at 51.55%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 5.91% trails the industry average.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.

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