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Herbalife shares soar as Wall St. buys into growth outlook

May 3, 2011 |  9:31 pm

Like every direct-marketing company, Herbalife Ltd. needs its independent sales force to believe in its products and pitch them with passion.

The L.A.-based firm now seems to be engendering the same kind of response from Wall Street.

Shares of Herbalife, which markets weight-control products and nutritional supplements worldwide, soared past the $100 mark on Tuesday after the firm reported quarterly earnings sharply above expectations.

The stock surged $11.97, or 13.3%, to a record $102.22 on the New York Stock Exchange. The price has risen 50% this year after a 68% gain last year.

Fueled by a 28% jump in global sales, to $795 million, Herbalife earned $88.3 million, or $1.43 a share in the quarter ended March 31, up 44% from $61.5 million, or 98 cents a share a year earlier.

Herbalife_logo Appealing to investors' perpetual hunt for genuine growth stories, Herbalife says it is strategically positioned at the intersection of “two large mega trends: the global obesity epidemic and the desire for people to earn more income,” as CEO Michael Johnson put it in the earnings announcement late Monday.

He could have added a third mega trend: the rapid economic growth in many developing nations, which is where the company has long racked up the bulk of its sales via an army of 2.3 million independent distributors worldwide.

Historically, Herbalife has relied on its individual distributors to sell consumers a monthly supply of weight-control shakes or snacks, or other supplements. But in recent years the company has been shifting to what it calls a “daily consumption model” -- the idea being for distributors to reach the same customers every day, such as by forming “nutrition clubs” that encourage people to stop by for a shake and to sample other Herbalife products.

The concept, which has been a huge hit in Mexico over the last 10 years, now is “a primary driver of our distributors’ businesses and Herbalife’s growth,” President Desmond Walsh told analysts on a post-earnings conference call on Tuesday. . . .

Walsh has said as much before, but the company underlined the point by boosting earnings expectations for the full year. Herbalife said it expected 2011 profit in the range of $5.54 to $5.78 a share, up from previous guidance of $5.15 to $5.40.

Direct-marketing businesses understandably make some investors nervous because of their often cult-like air and pressure on distributors to enhance their own wealth by pulling more people into the marketing operation.

Michael o johnson Herbalife, founded in 1980 by Mark Hughes (who died from an accidental alcohol and drug overdose in 2000), has been no stranger to lawsuits over the years, including from distributors who’ve accused the company of operating an illegal pyramid scheme -- allegations the firm has always denied.

Wall Street clearly sees a growth machine, not a legal issue.

Scott Van Winkle, an analyst at brokerage Canaccord Genuity in Boston, was one of several who reiterated “buy” ratings on the stock on Tuesday. He noted that, in direct marketing, success tends to breed more success by stoking distributors’ “motivation and excitement,” which gives them a stronger story to pitch to potential new distributors.

On the conference call, CEO Johnson was effusive about Herbalife's growth outlook.

“While the news is good and heady, we’re just getting started,” he said. “We think the momentum is really just beginning.”

-- Tom Petruno

Photo: Herbalife CEO Michael Johnson. Credit: Herbalife

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