7 Reasons to Be Bullish on Herbalife

Over the past couple of years, Herbalife  has faced attacks from many different groups, and its share price has fallen significantly as a result.

• May 2012: Shares of Herbalife collapse after David Einhorn asks critical questions of the company during its conference call.
• December 2012: Shares fall to new lows after hedge fund manager Bill Ackman announces his billion-dollar short position in the company, releases a 342-page presentation attacking the company, and gives the stock a price target of $0.
• January 2014: Senator Markey calls on the FTC to investigate Herbalife. 
• March 2014: Shares fall even further after the FTC announces they are investigating the company. 
• NY Attorney General begins investigating Herbalife. 
• Presently: The company is one of the most hated stocks on Wall Street, with shares down by over $25 from their highs, a short interest of over 20%, and a Motley Fool CAPS rating of 1/5 stars.

In spite of all the pessimism, however, I remain extremely bullish on the stock.

Here are seven reasons I believe the stock will go up over the next few years in spite of the pressures being placed against it.

1. The worst-case scenario is unlikely
It's unlikely the FTC will be able to shut down Herbalife entirely. Case precedent is in favor of Herbalife, with the FTC having gone after, and losing to, Amway over similar issues in 1975.  

Additionally, one of the main requirements for a company to be considered a pyramid scheme is that a significant percentage of profit needs to come from recruiting new members rather than from the sale of product. Because many distributors use Herbalife's products personally, it is difficult to distinguish between revenues from new distributors joining the company, and revenues from distributors purchasing the product for their own consumption. Herbalife claims that 73% of the people who become distributors do so in order to receive discounts on products they personally consume.

The problem the FTC has is that this is an extremely difficult thing to disprove. Even if this percentage is wrong, the burden of proof lies with the FTC to show that the majority of Herbalife's distributors are loading up on inventory rather than personally using it, or selling it to others who will use it.

Shutting down Herbalife is an uphill battle that Bill Ackman and the FTC will likely lose if they attempt it.

2. The U.S. represents only 18% of the company's sales
Even if new regulation is enacted in the U.S., it shouldn't affect the company's sales in other countries. Herbalife makes 82% of its sales outside of the U.S., so unless you believe the FTC will shut down the company altogether, then the maximum damage to revenue should be 18%, assuming margins are relatively constant between countries. In reality it will probably be less than this; The U.S. only represents 15.45% of the companies total contribution margin.  

Assuming that Herbalife's earnings do decrease by 18% the company should still have forward earnings of well over $4.00 per share. With a P/E of 14.5, the company would still be relatively cheap.

3. Cheap valuation 
At $56 a share, the company is trading at just 11.4 times trailing-12-month earnings, and less than 9.3 times forward earnings. This is significantly cheaper than the S&P's current average multiple of 18 times ttm earnings.

When you factor in the company's strong growth rate of 21.2% net income growth over the past five years, the company begins to look like an absolute bargain.

More important perhaps even than Herbalife's growth in earnings is what the company has done with its excess cash: Dividends and share buybacks.

4. Dividends and share buybacks
The company currently pays $0.30 quarterly for a yield of 2.26%.

In 2013, Herbalife bought back $300 million worth of shares. The board is currently authorized to spend an additional $1.5 billion on share repurchases going forward.

Herbalife's share buybacks have not been new. The company has been repurchasing shares since 2007, and over this time has been able to reduce its share count from 145.4 million to 107.4 (diluted and adjusting for stock split).

These share buybacks have helped accelerate HLF's earnings growth and given shareholders a larger percentage of the company over the past seven years.

5. Icahn
Whether your views on Icahn are positive or negative, the fact that he is a large investor in the company may help the stock.

The activist investor acts as a counterforce to Bill Ackman and may help Herbalife in the regulatory fight.

Additionally, Carl Icahn is likely to advocate more aggressive actions to boost the company's share price, including greater share repurchases and increases in dividends. Earlier this year, Icahn had pushed for Apple (NASDAQ: AAPL) to increase its share repurchase program by $50 billion.

While Apple does have significantly more cash on hand then Herbalife does, the comparison is not that outrageous. Both Apple and Herbalife have strong free cash flow that it could use to increase dividends or share repurchases.

Additionally, because Herbalife's cash flow has been so stable, it may make sense for the company to increase its debt load to repurchase shares while interest rates are low and the company's stock is cheap.

Icahn wants to see shares of HLF rise both for the immediate gain he could realize and in order to try to squeeze out short-sellers such as Bill Ackman. Share repurchases and dividends are one of the easiest tools available to accomplish this goal.

6. China: Limited risk with huge potential upside
In addition to the U.S., regulators in China are also looking into the legitimacy of multi-level marketing.

Last January, the Chinese government announced it was investigating multi-level marketing company Nu Skin for its business practices.

In March, the company announced it was forced to pay a relatively small sum of $524,000 for having not obtained proper licensing. This was a far less severe punishment than many had expected.

While the investigation is not over yet, the news looks positive for companies like Herbalife, as it may signal that the Chinese government won't go after the multi-level marketing industry.

Unlike Nu Skin, however, Herbalife is not significantly tied to China. The company does just 11% of its business in China, compared with 43% for Nu Skin. If China decides to go after the multi-level marketing industry in the future, Herbalife will not be affected as much as other similar companies such as Nu Skin. Additionally if new regulations in China are not enacted, then China could present a huge growth opportunity in the future.

7. The stock is hated

Perhaps one of the greatest benefits of being a Herbalife bull is the negativity surrounding the stock.

Herbalife has been a very headline-driven stock over the past couple of years as the company has faced attacks from hedge funds, legislatures, and the FTC, as well as support from various people such as Carl Icahn. Any positive news, especially the FTC dropping their investigation, could lead to a sudden and rapid increase in share price as short-sellers cover their positions. 

Additionally, any negative news the company receives may push shares lower, offering investors the chance to buy into the company at an even cheaper valuation. Herbalife remains one of the most undervalued companies already, and investors should consider taking advantage of the opportunity by buying on any dips.