Herbalife Takes Key Independent Research Analyst Downgrade

Argus has downgraded Herbalife’s near-term rating to Hold from Buy. Argus is truly independent research, unconflicted by trading operations or by convoluted investment banking relationships. The basis for the call is that the recently announced Federal Trade Commission investigation will limit any near-term upside. The FTC probe pertains to Herbalife’s business practices, including its operations in China.

The Argus report says:

Herbalife’s business model has been challenged before, notably by short seller Bill Ackman of Pershing Square. Mr. Ackman charged the company with being a “pyramid scheme” in December 2012, and the shares have been volatile since that time.

Friday’s downgrade pointed out that Herbalife shares are trading at only 8.6 times the Argus earnings estimate for 2014, which is toward the low end of the historical average range of six to 23 times earnings and below the peer group average of 15 times earnings.

Argus also said:

The company posted strong results in 2013, and we believe that its core business remains solid. However, in view of the significant risks posed by the FTC investigation, we think that the shares have limited near-term upside and that a Hold rating is now appropriate.

The firm simply believes that Herbalife shares are unlikely to recover until the investigation is completed — and that only 20% of the company’s business is in the United States so additional scrutiny of its operations by other nations could hurt the shares.

The caveat here is that if the FTC investigation turns out favorably, then Argus would consider returning the stock to its Buy list. Also, Argus reaffirmed its five-year Buy rating on Herbalife, based in part on the potential for earnings growth and because its balance sheet remains among the strongest in its sector.

Herbalife shares were down to $49.90 after the downgrade, after closing at $50.79 on Thursday. The 52-week range is $34.72 to $83.51, and investors have felt the sting as this was a $65 stock just two weeks ago and a $58 stock only five days ago.