Herbalife (HLF) Suffers One Two Punch of Weak Forecast and David Einhorn « Market Montage

Herbalife (HLF) was having a rough day dealing with an earnings forecast below expectation offered last evening, but it just got worse as apparently noted hedge fund manager (and short seller supreme – think Lehman Brothers) David Einhorn got on the conference call to "ask some questions".   Once Einhorn gets involved you can bet a ton of institutional "me too" money will piggy back.  We saw that in Green Mountain Roasters (GMCR) last year. [Oct 26, 2011: David Einhorn has Crushed Green Mountain Roasters]  Per flyonthewall.com

On its Q1 earnings conference call, noted short-seller David Einhorn asked the company about some of its previous 10Kdisclosures. Eihhorn specifically noted that the company had listed three groups of distributor as "at the low end" in a previous filing but stopped disclosing that in its last 10K. In response to the question of whether the company stopped tracking or stopped disclosing that information, an Herbalife executive said the criteria for grouping distributors in to different classes was based off of volume purchases. The company said the reason it took the information out of the 10k was related to a change in CFO, noting it did not view the information as valuable information to the business or to investors. The company said its "objective is to be completely transparent."

In the near term, it doesn't matter who is correct or what the real story is – it just matters that someone of this nature is sniffing around the company.  That will incite others to believe something stinks.  I can't show you the action intraday but the stock immediately fell from $68s to $61s and circuit breakers were triggered per the twitterverse.

As for earnings, they were fine this quarter but guidance was lacking.  But that was a small issue in comparison to being in Einhorn's eyesight.

  • Nutrition and weight loss company Herbalife Ltd reported a higher-than-expected quarterly profit as it sold more products across all its regions but forecast second-quarter earnings below estimates.  The company expects a second-quarter profit of 91 cents to 95 cents, below Wall Street estimates of 96 cents, according to Thomson Reuters I/B/E/S.
  • For the first quarter, the company earned $108.2 million, or 88 cents per share, compared with $88.7 million, or 71 cents per share, last year, excluding items.
  • Herbalife, which competes with the likes of Weight Watchers , Nutrisystem and Medifast Inc, said revenue rose 21 percent to $964.2 million.
  • Analysts, on average, expected it to earn 81 cents a share, on revenue of $892.9 million.

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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/index.php/the-fund/holdings