Herbalife International Inc. founder Mark Hughes is a man with big dreams. He is not only building a 45,000-square-foot house in Benedict Canyon, but he wants to conquer the world with his nutritional, dietary and beauty-care products.
Yet recently, Hughes bit off more than he could chew, and Herbalife is paying the price.
The flamboyant Hughes, 43, last year announced he would take his publicly traded company private by buying back all the outstanding stock he didn’t own at $17 a share. That’s considerably less than the high of $27 that Herbalife stock was trading for in spring 1998, but more than what it was trading for last week. It closed April 19 at $10.43 a share.
Early this month, Hughes was forced to drop the $500 million deal because he wasn’t able to garner enough capital in the high-yield financing market. The company later announced it would take a first-quarter charge of between $8.5 million and $10.5 million as a result of the collapsed buyout transaction.
This came after the company announced it would settle a class-action lawsuit filed by stockholders challenging the fairness of the $17-a-share tender offer. Since these announcements, Herbalife’s stock price has fallen precipitously, hitting a 52-week low of $9.63 on April 18. Its 52-week high of $16.37 was reached on Jan. 14.
Herbalife executives, particularly the normally press-friendly Hughes, have been unusually closed-mouthed since the announcements. Officials did not return calls from the Business Journal.
Despite the stock plunge, financial analysts remain generally bullish on the company’s future.
“They are in a group of companies that is out of favor on Wall Street right now. The valuations are low not only for Herbalife, but for their competitors,” said Scott Van Winkle, an analyst with the Boston-based investment bank Adams, Harness & Hill.
“At $10 a share, the company is so cheap it’s not even funny,” said Richard Todaro, portfolio manager at Kennedy Capital Management in St. Louis, which holds $1.2 million Herbalife shares.
Todaro strongly recommends Herbalife stock, particularly Class L shares which yield a $2 annual dividend on a $10 stock price. In one year, they convert to non-voting Class B shares, which have a yield of 7 percent.
The main reason analysts like Herbalife is that it continues to increase its sales and net income. “The financials on the company are still pretty solid,” Todaro said.
Net income for the fourth quarter ended Dec. 31 was $17.5 million (56 cents per diluted share), up from $11.3 million (38 cents) in the year-earlier quarter. For 1999, the company reported net income of $56.9 million ($1.86 per share) compared with $48.5 million ($1.60) in 1998. First-quarter results will not be released until April 28. Last year’s revenues were $956.2 million vs. $866.6 million in 1998.
Herbalife was started in 1980 by a then-twenty-something Hughes, who employed multilevel marketers to sell his nutritional products through independent distributors. As chairman and CEO, Hughes owns about 60 percent of the company.
With U.S. sales of Herbalife’s 171 products flat, the company has branched into the international market to boost sales. Last year, it expanded to India, Iceland, the Slovak Republic and Jamaica.
From Jan. 1, 1995, to Dec. 31, 1999, Herbalife expanded to 22 new countries. It is now in 47 countries and plans to branch out to China this year.
“The natural growth of this industry is outside of the U.S., particularly in Southeast Asia and Latin America, where direct sales is much more widely accepted by the public,” Van Winkle said.
Currently, U.S. sales comprise about one-fourth of total revenues. Asia and the rest of the Pacific Rim make up nearly half of revenues, while Europe and other markets account for the rest.
Also as part of its expansion plans, Herbalife continues to add to its existing product lines. In the last two years, it has introduced nine weight-management products, 25 nutritional supplements and 37 personal-care items. Some of the nutritional products are geared toward children and seniors.
Several analysts said Hughes is finally starting to rebuild his company’s credibility among stockholders following his buyout deal’s collapse.
