Instead of Crumbling in 4Q, Herbalife Impresses Wall Street

LOS ANGELESHerbalife Ltd. continues to exceed Wall Street's expectations despite fighting a public relations war and facing a Securities and Exchange Commission probe following allegations from an investor that its business model is an unsustainable pyramid scheme.

The company on Tuesday posted earnings per share (EPS) of $1.05, reaching the high end of its pre-announced guidance and a few pennies above analysts' consensus. Herbalife also raised its EPS guidance for the year to $4.45 to $4.65, from $4.40 to $4.55. In 27 of the last 28 quarters, the global nutrition company has beat Wall Street's consensus on EPS, according to equity analysts with SunTrust Robinson Humphrey.

Shares of Herbalife (HLF) plunged after hedge fund manager William Ackman of Pershing Square Capital claimed in December the multi-level marketing company is destined to collapse. Herbalife has vigorously denied that it operates an unlawful pyramid scheme, and the stock price has been rebounding since Christmas Eve when the stock fell to a 52-week low ($24.24). It closed at $37.78 on Wednesday.

"We believe, based upon the advice of experts and prior guidance from the FTC in this area, that our network marketing program is compliant with applicable law," Herbalife declared Tuesday in a 10-K filing.

In the filing, Herbalife disclosed the Securities and Exchange Commission (SEC) has requested information on its business and financial operations after it requested a meeting with SEC staff. The company said it is cooperating with the agency.

Analysts observed that Herbalife's auditor, KPMG, gave an "unqualified opinion" on the effectiveness of its internal controls regarding its financial reporting.

"Bullish guidance for 1Q13 and an increase to FY13 guidance likely indicates that the negative publicity that Pershing Square is creating is not having a significant impact on actual results, at least at this point," equity analysts Brian Wang and Meredith Adler of Barclays wrote in a research report. "Additionally, the fact that KPMG signed off on the 2012 financial results may ease the concerns of some investors."

In the fourth quarter, Herbalife posted net income of $117.8 million on net sales of $1.1 billion. Net sales, defined as product sales plus shipping and handling revenues, were up 20% over the year-ago period. The company raised its FY13 sales growth to 12-14%, up from 10-12%.

Guidance excluded certain items, including $10 million to $20 million in costs that predominantly consists of advisory and legal services to defend Ackman's claims, revealed Herbalife, which distributes its products in 88 countries (as of Dec. 31) through 3.2 million distributors. 

"It is clear that over time Herbalife is answering the questions that need to be answered and providing greater clarity around their business model - one that we see as simple but effective," D.A. Davidson & Co. equity analyst Timothy Ramey wrote in a research note.