Buy The Undervalued Herbalife

After Mr. Einhorn did not comment on Herbalife (HLF) in a conference on May 16, the stock jumped all the way to ~$50. Mr. Einhorn's silence reaffirms my initial thought that the question he raised for HLF in the earnings call is merely a simple clarification question without much sophisticated implication as considered by some investors.

The stock is currently trading at ~$45. Despite the recent price volatility, nothing has ever changed in the firm's operations. HLF remains a very profitable company with substantial growth prospects and free cash flow generating ability, and it has long been returning capital to shareholders through dividends and share buybacks. The stock is undervalued at this level on both relative and absolute basis.

Company Fundamentals

The firm is in a high growth momentum after the economic slowdown in between 2008 and 2009, while it continues to generate free cash flows to return capital to shareholders. Various financial metrics over the last 5 fiscal years are summarized below (USD in thousands):

Relative Valuation

Except for P/B ratio, all other price multiples suggest HLF is undervalued relative to its industry peers despite its historically higher growth and profitability. The stock now is trading at 10.4x 2013 forward P/E and 0.8x 5-year forward PEG. Assuming a 13x 2013 forward P/E (still lower than what it was traded before the earnings call) and a 2013 EPS of $4.13 (low end of the consensus estimates), the stock value should be ~$54, which is ~21% above the current price level.

Absolute Valuation

Then I ran a DCF model with fairly conservative assumptions as described below:

(click to enlarge)

The model yields a similar stock value of ~$55.

The mean target price by street analysts is $78.5, representing a ~75% upside. Given the sound corporate fundamentals, I believe the current trading level has limited downside risk but substantial upside opportunity. Investors should consider adding position for this bargain before it gets too late.

By Jin She

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HLF over the next 72 hours.