What a fantastic six months it’s been for Herbalife. Shares of the company have skyrocketed 79.4%, hitting $18.10. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Herbalife, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Herbalife Not Exciting?
Despite the momentum, we don't have much confidence in Herbalife. Here are three reasons why HLF doesn't excite us and a stock we'd rather own.
1. Demand Slipping as Sales Volumes Decline
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
Herbalife’s average quarterly sales volumes have shrunk by 3.9% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Herbalife’s revenue to rise by 4.3%. Although this projection suggests its newer products will spur better top-line performance, it is still below the sector average.
3. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Herbalife, its EPS declined by 14.4% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Final Judgment
Herbalife isn’t a terrible business, but it doesn’t pass our quality test. After the recent surge, the stock trades at 7.8× forward P/E (or $18.10 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward the Amazon and PayPal of Latin America.
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