Herbalife Bull Says Last Night's News 'Disappointing' ... For Shorts

Herbalife Ltd. (NYSE: HLF)'s announcement early Monday morning that it now expects its revenue to fall short of prior estimates sent the stock lower by more than 5 percent. But not all among the Street sees this warning as a bearish sign, including Pivotal Research Group's Timothy Ramey.

Ramey maintains a Buy rating on Herbalife's stock with a price target boosted from $105 to $120 as the company's announcement is in reality "terribly disappointing if you are short the stock."

There Is No Strong Short Thesis

The short thesis against Herbalife's entire existence was two-fold, Ramey explained. First, Herbalife is an illegal pyramid scheme as the business model implies that no one buys its products for the product merits alone. Second, if Herbalife is indeed a pyramid scheme it is a matter of when, not if, regulators will shut the company down.

None of these theories gained validation Monday.

But there is also a third short thesis which doesn't suggest doom-and-gloom for Herbalife, rather a slowdown in sales that would justify a change to financial models, the analyst added. In this case, the short thesis is "completely plausible," but the company's announcement also dispels this view since it consists of a call-down in sales guidance but a boost in its earnings per share guidance.

In fact, Ramey's own estimates were calling for a soft sales and above-guidance earnings per share in the quarter, which implies the analyst won't be making any changes to his model.

"While we don't believe HLF is in decline, we do believe that that the deceleration short thesis is wrong, even if is right on the deceleration," Ramey concluded. "[Consumer Packaged Goods] companies declining in reported sales are, today, the rule rather than the exception. HLF comps itself against a field of companies that are much more richly valued, yet struggle to find top-line growth."

At last check, shares of Herbalife were down 6.43 percent at $69.17.

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