Nutrition company Herbalife Nutrition Ltd. (HLF) has been the subject of several controversies over the years, including activist investor Bill Ackman’s allegation a decade ago that the company’s  multi-level marketing business model was a pyramid scheme. Ackman ultimately lost $1 billion in betting against the stock. Activist investor Carl Icahn, who stood by the company during that controversy, said “The time for activism has passed as the company has grown.” He lowered his 16% stake in the company to 6%, selling $600 million of the stock back to the company.

The stock has rallied 50.5% over the past year to close yesterday’s trading session at $47.15. And HLF is expected to thrive this year and beyond on people’s increasing  consciousness regarding their nutritional choices, which is driving increased demand for HLF’s products.

Furthermore, the company has increased  focus on its digital operations lately, launching an immersive ARIA 360 AR fan experience in January and appointing its first Chief Digital Officer, Joe Miranda, in March.

Here are the factors that we think could influence HLF’s performance in the coming months:

Increasing Demand for Health and Wellness Foods

The demand for health and wellness foods has been increasing with  consumers’ growing concerns about   health and fitness. According to Fusion Market Research, the size of the global health and wellness food market  is expected to hit $897.82 billion by 2025, up from  $768.20 billion in 2019. HLF provides meal replacement protein shakes, drink mixes, dietary and nutritional supplements containing herbs, among others, and should benefit from this trend.

Solid Financials

HLF’s fourth quarter (ended December 31, 2020) net sales, which came in at $1.41 billion, represent the largest fourth quarter net sales result in its history. Net sales from the Asia Pacific region, which accounted for 26.8% of HLF’s net sales, increased 14.4% year-over-year to $377.90 million. The company’s gross profit increased 11.2% year-over-year to $1.10 billion for the quarter, while its net income came in at $73.80 million, up 30.2% year-over-year.

Reasonable Valuation

In terms of forward non-GAAP price/earnings ratio, HLF’s 10.22x is 51% lower than the industry average20.88x. In terms of forward P/S ratio, the stock’s 0.93x is also lower than the industry average 1.62x. Also, its forward enterprise value/sales of 1.20x is 43.9% lower than the industry average 2.14x.

Favorable Analyst Estimates

Analysts expect HLF’s revenue to increase 13.9% for the quarter ended March 31, 2021, 15.9% for the quarter ending June 30, 2021 and 9% in fiscal 2021. Its EPS is expected to grow 31.3% for the quarter ended March 31, 2021, 24.8% in fiscal 2021 and 11.4% in fiscal 2022.

It has an average broker rating of 1.12. Also, all four Wall Street analysts that rated the stock have rated it a Strong Buy or Buy. HLF is expected to hit $69.67 in the near term, which indicates a potential upside of 47.8%.

POWR Ratings Reflect Rosy Prospects

HLF has an A overall rating, which equates to Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. HLF has an A grade for Value, which is in sync with its lower-than-industry valuation ratios.

HLF  has an A grade for Quality also. This is in sync with its 48.7% trailing-12-month gross profit margin, which is higher than the industry average  35.4%. Its trailing-12-month return on total assets of 12.1% is also higher than the industry average 4.7%.

The stock has a B grade for Growth, which is consistent with analysts’ expectations that its revenue and EPS will increase significantly in the coming quarters.

HLF is ranked #4 of 12 stocks in the B-rated Medical – Consumer Goods industry. Click here to see the additional ratings for HLF (Stability, Sentiment, and Momentum).

If you’re looking for other top-rated stocks in the Medical – Consumer Goods industry, with an Overall POWR Rating of A or B, you can access them here.

Bottom Line

Given HLF’s favorable revenue and EPS estimates, the stock appears undervalued at its current price level. And as the demand for health and wellness foods increases, the company should witness higher sales. Also, HLF is well-positioned to capitalize on this industry tailwind based on its solid financials. So, we think it’s wise to bet on the stock now.

HLF shares were unchanged in premarket trading Thursday. Year-to-date, HLF has declined -1.87%, versus a 11.59% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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