Herbalife Ltd. (NYSE:HLF) has my attention today. The shares of Herbalife have been consistently northbound with huge daily gains in the last couple of days. In fact, the shares of Herbalife gained an impressive 16.46% in yesterday’s session to close at $46.69.
Herbalife with its market capitalization of 3.69% is a Cayman Islands-based global nutrition company. The Company sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products as well as personal care products. It distributes and sells its products through a network of independent distributors, using the direct selling channel.
Focus on the Important Things
There have been serious arguments for and against Herbalife’s business model in the last one year. Some people believe that Herbalife is running a pyramid scheme that is bound to come crashing soon. However, others believe that Herbalife runs a legitimate business and that an FTC probe (a previous article) had not yielded any result to suggest otherwise. In fact, a Los Angeles judge dismissed a lawsuit and the FBI even turned the tables against Bill Ackman, who had been championing the lawsuit against Herbalife.
However, I think that investors might want to consider investing more time and resources into conducting due diligence before they make a decision about investing in Herbalife. Thankfully, options traders are not encumbered with such responsibilities. I strongly believe that options traders should be less concerned with the core business proposition of Herbalife inasmuch as it can be proven beyond reasonable doubt that Herbalife isn’t a penny stock.
- Share Performance
The shares of Herbalife have recorded a 52-week low of $27.60 and a 52-week high of $69.69 within the last one year. Hence, the stock effectively trades at a 61.16% premium to its 52-week low and it trades at a 49.26% discount to its 52-Week high. The chart below provides valuable insight into how the shares of Herbalife have traded since the stock became publicly traded about one year ago.
The stock was practically in a downtrend, with the occasional range-bound trading sending the stock lower from June through December 2014. However, the stock started an uptrend in January 2015 and the each range-bound trading has the stock surging to new highs. The stock has recently broken out above the $40 support – $45 resistance range; hence, we can expect new highs to follow.
- Business Performance
The second important factor that requires our attention is the performance of Herbalife’s underlying business. On May 01, Herbalife reported its first quarter (Q1 2015) earnings result to beat the consensus analysts’ expectations in the top and bottom lines.
The company reported first quarter earnings of $1.29 per share to beat the consensus estimate of $1.00 by 29%. The EPS of $1.29 also comes above the company’s guidance range on EPS of $1.00 – $1.10.
The company reported revenue of $1.10B to beat the consensus estimate of $1.05B even though it marks a 12% annual decline due to currency headwinds. Nonetheless, the revenue was in line with a guidance of a 12.5% to 15.5% decline.
With the first quarter results, Herbalife has delivered back-to-back quarterly gains to erase the disappointments from the first two quarters after it went public. In addition, the company has effectively beaten estimates in 18 out of the last 20 quarters.
Going forward, Herbalife expects earnings of $1.05 to $1.15 and a revenue decline of 10.5% to 13.5% in the second quarter. The company expects currency headwinds to have a negative impact on net sales and earnings. However, the stock has continued to soar since the earnings release, and it suggests that Herbalife investors are getting used to seeing the company “underpromising” only to “overdeliver” at the end of the quarter.
How to Trade HLF Options
I am optimistic about the prospects of Herbalife stock and options and I recommend buying HLF call options. You should consider buying the HLF Aug 2015 50.000 call (HLF150821C00050000) at an asking price of $4.60.
— Daily Option Alerts