Clearly, the company reaching its long-awaited resolution with the FTC cheered investors.
Though worries over possible regulations in markets like China continue to hang over the company, investors are satisfied that the FTC issue is behind Herbalife. The regulator told the company to restructure its controversial multilevel marketing operations. The stock could carry on surging upwards, affording you both growth and protection in a risky market.
On July 15, consumer protection watch-dog FTC mentioned that Herbalife International of America, Inc., Herbalife International, Inc., and Herbalife, Ltd. have decided to fully restructure their U.S. business operations and pay $200 million to pay off consumers thereby settling Federal Trade Commission charges.
What were these FTC charges?
The FTC specifically talked about these companies deceiving consumers into believing they could earn substantial money selling diet, nutritional supplements, and personal care products. This was the trigger that sent HLF shares into a tailspin.
When Herbalife disclosed second-quarter earnings on Aug. 3, the scorecard impressed investors as the company's earnings-per-share (EPS) and revenue beat estimates.
Of course, the $200 million fine caused the company to report a loss, but after adjustments EPS reflected growth. To make things even better, Herbalife raised its full-year EPS guidance to $4.50-to-$4.80 from $4.40-to-$4.75.
The settlement also bludgeoned hedge fund titan Bill Ackman, famously short on Herbalife.
The truth is, the direct selling industry has been facing several challenges. Avon Products in 2014 lost its top global-direct-sales-company title to privately held Amway. Avon quit the DSA model two years ago. The biggest issue troubling the sector is that companies make tons of money by recruiting people, and precious little by selling actual products.
Also, apparently direct selling companies show product sales to agents as revenue. Another issue that has been highlighted by the FTC is that financial profits as claimed by agents, are dubious.
It's clear that from here on, herbalife will have to make truthful claims about how much money its members are likely to make. By imposing requirements that include a limit on the amount of compensation for product sales for personal consumption, some feel direct selling valuations will flounder.
However, as of now, these worries haven't scared off investors. Time will tell, as always. As you read, Avon shares are up 27.65% year-to-date (YTD). Herbalife is up 21.93%. Smaller peer Nu Skin is up more than 52%. Another, MLM Aceto is however down nearly 9% YTD.
While FTC regulations could dash hopes of fast growth, Herbalife investors are largely satisfied, given that the decree allows Herbalife to neither admit nor deny wrongdoing.
This should help restore the image of the company and gain traction in retail sales and add agents. Another positive spot is that Herbalife's largest shareholder, investor Carl Icahn hasn't started selling the stock.
Herbalife is expected to see in the 3%-to-5% range for sales growth in 2016 and 2017. This company has come back from the dead and remains a growth opportunity amid an overbought and volatile market.
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