Business

‘Sell’ report fails to chill Herbalife

Herbalife shares look to be wrapped in Kevlar.

The controversial diet-shake seller’s stock, one of the hottest this year with a gain of 136 percent, barely budged Monday after getting hit with its first sell recommendation.

Shares in the Los Angeles company slipped 0.5 percent, to $77.92. That’s quite a contrast to the effect a sell recommendation had Dec. 27on equally high-flying Twitter.

The hot tech stock fell 13 percent after an analyst wrote in a report that its quick ascent was too much, too soon.

Herbalife, which activist investor Bill Ackman thinks is a pyramid scheme, raced to a year-long advance after Ackman knocked the stock down 30 percent to its low of $26.06 on Christmas Eve of 2012.

This year, more than a half-dozen hedgies lined up against Ackman to turn Herbalife into something of a hedge-fund cult stock.

In his sell report, S&P Capital IQ analyst Tom Graves said that all the good news — and then some — is already baked into the price at recent levels.

“We still expect that concerns about its business model, the sustainability of its growth, and possible regulatory scrutiny will limit valuation of the model,” S&P said in its report.

On Dec. 23, the day Ackman put out another letter to his investors promising to reveal more dirt on the company in 2014, Herbalife shares hit their all-time highs, closing at $80.80.

At that price, Herbalife shares were trading at 15 times forward earnings — the highest multiple the stock has ever reached.

Since then, shares have fallen every day, despite increased price targets to $90 by two other analysts.

Herbalife was off 0.5 percent Monday to close at $77.92.

Herbalife shares had soared on a recent re-audit that was completed on Dec. 15, and showed no “material” problems, leading analysts and investors to believe the audit would open the door to a leveraged buyback of shares.

That belief has buoyed the stock ever since Carl Icahn mentioned the prospect when he bought 13 percent of the company in February.

But a stock repurchase in the mid-$30s — where it traded in February — makes more sense to Herbalife than one at $75 or $100, investors with cooler heads pointed out in recent months.

If Herbalife ended up paying a premium of $100 per share, a $1 billion loan would only allow the company to buy back about 10 percent of its float.

Moreover, three big-name shareholders — Icahn, George Soros and Bill Stiritz — own more than 25 percent of the stock and are expected to sell some of their holdings into any tender.

S&P still has a $75 price target on the stock.

That number is a premium to S&P’s historic valuation of the company, Graves said, because it is based on the view that a stock repurchase will happen — and will add $0.35 to 2014 EPS.

Ackman has restructured his short to protect him from the effects of a share buyback.

But he isn’t going away and believes regulatory intervention will eventually occur — which S&P is also factoring in.

Herbalife has denied Ackman’s claim.