I’ll start off by pointing out that today Herbalife “dropped a deuce” – that’s what I’m calling it when the company issues two PR’s that are non-material in one day.
Seemingly trying to outdo themselves, the company continues to blindly bludgeon the wires using their never ending trough of press releases, regardless of whether or not they have anything meaningful to disclose. Today’s press release was a “Happy Veteran’s Day” salute by Michael O. Johnson, the guy who runs the company that these veterans claim ripped them off for tens of thousands of dollars. And, since it’s Veteran’s Day, let’s not forget this retired Air Force veteran who dumped $3,000 into the company thinking he could become a millionaire. Along the same ironic lines of the company releasing a Veteran’s Day PR, we also get tons of Herbalife press releases celebrating the Latino community. Go figure.
Here’s my updated chart of Herbalife’s press releases, per month, for the last couple of years. We’re on pace for nearly 10 this month – the November bar represents only the four press releases that have been put out so far in November. They’re averaging one every two days this month.
I believe Herbalife continues to be in a heap of trouble, and after speaking to a certain sell-side analyst today (who I told I would not quote, so I won’t), I’m just going to say that I’m not quite sure that people are getting the real picture about how dire the situation could become over at the ole’ Herbalife camp.
I’m also convinced that buy-side managers continue to judge this company strictly on financials and fundamentals (which are now equally as abhorrent as the underlying fraudulent business model, in my opinion). Believe it or not, someone is still putting a bid under this common at $38/share. This doesn’t account for the regulatory risk and it sure doesn’t seem to take into the account that the company could be headed for a liquidity crisis that could definitely put further pressure on the stock.
Much like how the bears had the Venezuela situation correct, I believe the commentary by myself, Mr. Ackman (on his PSQ call today), and Matt Stewart over this last week will be earmarked the “canary in the coalmine” for what I believe to be Herbalife’s coming liquidity crunch.
Let’s talk about cash flow for a second.
The company has about $100M in interest rate risk next year, and $750M the year after.
Let’s be generous and say the company is going to have FCF of $450M next year. Using this figure, the company has about 2-3 years worth of cash flow tied up only in debt. A couple of years after that, they have the convertibles to worry about. Can the company deal with this debt without accessing the capital markets?
The company’s balance sheet lists them with $678 million in cash. No problem, right?
Except the company admits near the end of the filing that they really only have $180 million in the U.S. So, one has to assume the rest of the cash may not be easily accessible, may be subject to taxes, and may be subject to costs associated with repatriating it.
“Taxes can’t be a problem,” you’ll say to me.
Glad you mentioned it. My buddy Matt Handley has been doing some fantastic work on some potentially unnoticed Herbalife tax exposure that I’d also like to point out. For instance, this Mexican tax liability, buried in the company’s 10-Q, states that there could potentially be $100M+ in taxes assessed. Not an extremely huge deal when you have nearly $700M in cash. A massive deal when only $180M of your cash is in the U.S. and you have debt to pay off.
In addition to Mexico, here’s some of the other exposure Matt pointed out.
Thanks for this, Matt.
To me, it seems obvious that the company is going to have to access the capital markets at some point soon – if it survives. Considering the only capital they were able to get a while back was the convertibles, I find it unlikely that the company is going to be able to access the unsecured debt market on any type of favorable terms. The company may have to do an equity raise which, if it happens, has the possibility to undo all of the buybacks the company has partaken in and then some. As the stock continues to decline, the potential implications from an equity raise get worse and worse. If management was proactive, they’d be working on it right now, before the common heads towards $30. Or $0.
One thing for certain, I believe the company is going to need to access capital soon.
As Ackman said on his maiden Pershing Square Holdings call today, the company has virtually no assets. Being generous, I estimate the company has about $1 billion in tangible assets, versus the $2.3 billion listed that still leaves them with negative $400M in shareholder’s equity.
What’s the company’s next move going to be?
I continue to believe this company is one bad headline away from a total collapse. I’m not sure what big name has been selling, but we’re due to find out by this Friday when those disclosures are due. We’ll see a lightened Fidelity stake and potentially be offered more clues as to whether or not other major holders are shaving their positions. Over 25 million shares traded hands last week – someone is selling. More importantly, who has been buying, paying 8x FCF for this company? Those answers, perhaps coming soon as well.
I believe that Herbalife is a global confidence game that makes money by bilking unsophisticated business seekers. I continue to believe it’s only a matter of time before this saga ends. Whether the company continues to implode on its own or the FTC steps in, I believe Herbalife will eventually be shut down.
You can read Herbalife’s latest 10-Q filing in its entirety here.
(DISCLOSURE: I am short Herbalife via puts)