Monday, 12 August 2013

Herbalife, A Ticking Time Bomb?

I am sure people who follow the news must have noticed something pretty exciting going on lately in the world of hedge funds, the billion dollar bet made by Bill Ackman against prominent fund managers like George Soros, Carl Icahn and Robert Chapman. Indeed if anyone pays a close enough attention to Herbalife, one can see that Bill Ackman is outmatched. But the billion dollar question is: Does billionaire Bill Ackman has a case for shorting Herbalife shares? Is Herbalife really a pyramid scheme that has the potential to uproot lives of millions of people? Read the disclaimer first before reading this post, as this article simply expresses the opinions of one man's quest in search for the truth.

Seeing as to how Pershing Square Capital Management, L.P has compiled a list of reports, conferences and interviews, I will not be adding anything new. What I will offer instead is original analysis into the validity of this company and whether I feel that the share price of Herbalife will be heading up towards $100 mark or diving down back to the bottom. All information, evidence, articles, are derived from

I actually side with Mr Bill Ackman's views on Herbalife. There are a few reasons why I side with Mr Ackman and I will henceforth carry out my analysis:

1. Herbalife is an MLM company
I have never been supportive of MLM comapnies since I was almost roped into one a few years ago. Their aggressive sales tactics, with their promise of insane riches and driving a luxury car in ones early twenties is like a shortcut to that possible million dollar dream. In my country, a few MLM companies like Sunshine Empire, and more have shut down once the market saturation point is reached. This means that there are no more downline for the uplines to take advantage of anymore. To be honest, I have never believed in the concepts of MLM as it is too heavily corrupted by greedy directors and founders. There are of course, a few MLM companies that I feel will bring riches to its distributors, when the products are actually able to be sold like Amway. However, since there are numerous news of overpriced Herbalife's products, I reserved my doubts about Herbalife's business model.

2. Its products have high margins, yet are not sold in stores and uncompetitive
29% of Herbalife sales come from Formula 1, a nutritional shake mix. However, there is no ready to drink offering of Formula 1, something that is highly unusual as industry peers all offer ready to drink offering for their nutritional shake. This shows a lack of competitive advantage by Herbalife yet it is able to have such high margins offering just 1 product without any competitive advantage relative to industry peers. Moreover, their products are not sold in stores, so where does all the sales and margins come from? From point 1 above, it could be a possibility that their main customers are the distributors themselves, and the distributors are left with the unsold stocks at their own homes.

3. It spends little on research and development
If Herbalife prides itself on providing quality products to their customers, why do they spend so little on research and development? That is also a reason why their margins are so high. Since that is the case, it really puzzles me why customers would choose an uncompetitive product with higher prices. The only explanation is that there is something else to be gained assuming that consumers make logical choices, which brings me back to point 1, the promise of insane riches and being your own boss (common in all MLMs) is a selling point that appeals to many.

There are many other more reasons that I believe should turn on an investor's red flag but personally, I will back away from investing in the company if it has these 3 factors. All the best Mr Bill Ackman, I am sure you are right about Herbalife, the only question is when will you be proven right. 

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