Pivotal's Tim Ramey Thinks Herbalife (HLF) FTC Investigation is Close to Being Resolved

(Updated - June 4, 2015 1:23 PM EDT)

Pivotal Research analyst Tim Ramey thinks the Herbalife (NYSE: HLF) FTC investigation is close to being resolved.

In a note to clients moments ago, Ramey said while it may seem like a fool’s errand to "make a call" on the timing and outcome of the FTC investigation, they believe a very clear roadmap has been laid out and it's worth sharing their thoughts.

Ramey said, gun to his head, he thinks it will probably be a "this summer" event.

From the note on outcomes:

We have always argued that the FTC investigation would have two principle outcomes of interest to Herbalife shareholders. First, it will be a thorough vetting of the MLM model and to the extent that the FTC finds that the Herbalife of today is operating a fair, reasonable and vigilant MLM, it will be a huge value creator for HLF shareholders. Herbalife is a growth company with enormous opportunities to grow for decades to come in 91 markets around the world. But the taint of MLM, the risk that the model was not sound, is the principle reason why HLF is not priced like a growth stock. We see the resolution of the FTC investigation enabling the Herbalife of tomorrow to trade like a growth stock, unlocking value in an unprecedented way.

A reasonable investor, examining the growth trends of Herbalife, even in light of the current negative impacts to growth of F/X and the compensation plan changes, would likely result in HLF shares trading at 20x EPS or more in our view. The MLM taint is the single factor that holds the stock back. If the resolution of the FTC matter clears that taint – once and for all – these shares will go much higher, we believe. We believe $100+ is a reasonable medium-term target, hence our risk-adjusted price target of $80.

The second outcome of the FTC investigation is that Herbalife will most likely be held responsible for something that harmed consumers. We have argued that there will be a price to be paid for sins of the past – lead generation, excessive income claims and excessive product claims. Once the FTC investigation opened, it was a near-certainty that there would be a finding that Herbalife was not always as vigilant and as effective as it is today at detecting and deterring bad behavior. So there will be some price to pay, likely a fine for its failure to supervise properly its distributors. It would be unreasonable to think that the FTC would get into this investigation and not extract some pound of flesh. In our view, there will be a fine, perhaps ranging from $10 to $50 million that Herbalife will be forced to pay to acknowledge that it was not always as good as it is today. The size of the fine will be subjective and a matter of negotiation, we believe. It must be considered that the Herbalife of today is likely not at all problematic. We believe the FTC will “give them credit” for the proactive steps they have taken to protect consumers. Taking these two impacts together, one positive, one negative, one can see why Herbalife “welcomed the FTC investigation.” Net-net, the day the FTC decision comes down is likely to be a very happy day for those who own the stock.

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