Photographer: Patrick T. Fallon/Bloomberg

The Stock Rally Isn't Doing Much for Herbalife

  • Herbalife has declined 4 percent since presidential election
  • Trump has ties to industry, Herbalife’s biggest investor

The U.S. equity market rally has been indiscriminate since the election of Donald Trump. Stocks of all stripes and sizes have been pulled higher by its force.

Curiously, Herbalife Ltd. isn’t one of them.

The controversial nutritional supplement company looked like, on paper at least, one of the more logical beneficiaries of a Trump presidency. Not only has the president-elect been paid millions by similar multilevel marketers, making him potentially sympathetic to the company’s situation, but one of his top advisers, the billionaire Carl Icahn, is Herbalife’s largest shareholder. Trump will have the power to reshape the Federal Trade Commission just as it begins overseeing an overhaul of Herbalife’s U.S. operations.

Yet the stock has sunk 4 percent since the Nov. 8 vote, revealing in the process just how concerned investors now are that Herbalife, which calls itself a “global nutrition company” with “scientific leadership,” can withstand the FTC order. The agency moved after activist financier Bill Ackman bet $1 billion against Herbalife four years ago and alleged that it is an illegal pyramid scheme, a claim that the company has repeatedly denied.

The FTC order, which a federal court required Herbalife to adhere to in a settlement, makes 2017 likely “the definitive year,” said Tim Ramey, a Pivotal Research Group analyst who has covered Herbalife since 2007 and defended it throughout the Ackman saga.

Investors have also been waiting for Herbalife to start returning cash to shareholders again, Ramey said. The company suspended dividends and stock buybacks in 2014 amid the FTC’s probe, which was prompted by Ackman’s allegations. It hasn’t moved to reinstate them after it reached the settlement with the FTC in July. The company has said it’s considering all options for its cash management and capital structure.

Peso Plummets

There are other challenges too. The dollar has gained strength since Trump’s victory, reducing the value of the overseas revenue that accounts for more than 80 percent of Herbalife’s total sales. Mexico, the company’s largest foreign market, has been especially hard hit, with its currency having tumbled 14 percent.

And the company is transitioning to its next chief executive officer, with Rich Goudis, its chief operating officer, taking over for longtime CEO Michael Johnson on June 1. In Goudis, Herbalife turned to an executive who has rarely been in the public eye.

The current CEO was a frequent target of attacks from Ackman, who described him as a “predator” running a “criminal enterprise.” He has already hinted that he’s not going to let Goudis off easy.

“They didn’t recruit a superstar from the outside,” Ackman said during a recent call with investors in his hedge fund, Pershing Square Capital Management.

In the Balance

Herbalife’s fate was forever altered in December 2012 when Ackman went public. His short wager against the stock so far hasn’t panned out, with Herbalife maintaining investor confidence enough to keep the shares above the level that Ackman bet against them.

The battle boils down to whether there is legitimate demand for Herbalife’s products. Ackman has said its revenue is derived from sales goals set for the company’s independent distributors, who must buy its products. Few achieve those rewards, so many lose money, Ackman contends.

Herbalife said there is demand, although it hasn’t provided much proof. The FTC largely sided with Ackman, though it didn’t call Herbalife a pyramid scheme. The regulator said Jan. 12 that as part of the settlement it’s using the $200 million fine Herbalife paid to refund 350,000 people who lost money trying to be Herbalife distributors. The company is rolling out systems for distributors to track purchases and an independent auditor with a seven-year term will report on its compliance with the order, which takes effect in May.

Trump’s election would have seemed a boon. Under Democratic control, the FTC increased oversight of multilevel marketing firms. Chairwoman Edith Ramirez, a party member who stepped down last week, oversaw the probe that led to the settlement. Trump can name a Republican chairman and make other appointments to shift control of the five-member commission to his party.

“It was not looking good for the industry if we had another liberal FTC,” said Kevin Thompson, a lawyer who represents multilevel marketing firms.

Messages to Trump’s transition team and Icahn seeking comment on the commission weren’t answered. 

The president-elect has previous financial ties to the industry. He was an endorser for ACN Inc., which sold gadgets like video phones. He earned $1.35 million for just three appearances from 2014 to 2015, according to the Washington Post. From 2009 to 2011, he was also the public face of Trump Network, which sold health-care products through distributors much like Herbalife, the newspaper said.

In one promotional video for Trump Network, the president elect arrives at an event in a limousine. Later at a lectern, he says “I’m a big fan of network marketing.”

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