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Analyst Watch: Herbalife Is Still a Buy

U.S. stock index futures pointed to a lower open for Wall Street on Wednesday, after disappointing housing and consumer spending data released a day earlier prompted some worries over the pace of economic recovery.

Here's what guests on today's Squawk on the Street are watching before the opening bell:

Herbalife , the global network marketing company that sells weight-management, nutrition, and personal care products, hit a record intraday high of $55.60 Tuesday sparked by quarterly earnings reported after the bell Monday.

Shares jumped 10 percent to $54.20 in after-hours trading as results exceeded its guidance, and the company forecast third-quarter earnings of 99 cents to $1.03 a share and 13 percent to 15 percent growth in net sales.

So is it too late to jump on the Herbalife bandwagon?

Not according to Timothy Ramey, food and beverage analyst with D.A. Davidson & Co. He has a "Buy" rating on Herbalife with a 12-to-18 month price target of $75.

Here's why:

Herbalife reported Q2 operating EPS of $1.32, compared to $0.77 last year, a 72 percent increase, beating our estimate of $0.92 and Street consensus of $0.93.

"Sales increased 20.5 percent year-over-year, 6.6 percentage points over our expectation of 13% growth. Q2 had a low tax rate of 28.3 percent, which contributed $0.04 to EPS; we expect a lower rate to be sustainable, as sales skew more toward developing markets such as China where rates are lower," Ramey said in a recent note.

On top of that, Herbalife's total volume was up 19.9 percent overall, and 21.1 percent in North America alone. Asia Pacific increased 52.8 percent; Mexico up 10.8 percent; and China up 25.7 percent.

"The only bad number was in South/Central America where volumes were down 1.9 percent in Brazil and Venezuela," Ramey says.

Overall currency was a $0.06 benefit in the 2Q.

Meanwhile, gross margin in the quarter was 82.7 percent, "up 150bp from Q209 and 50bp over our expectation," Ramey says.

And Q2 operating margin surged 430bp from last year and 380bp over our expectation, demonstrating the remarkable leverage to the SG&A line.

Ramey also notes that HLF repurchased 1.1 million shares and increased the dividend 25 percent. The company is using its $1.60 per share in cash flow to drive significant shareholder value. $51.2 million of the $1 billion share repurchase authorization was used in the quarter. HLF ended the quarter with net debt of $73.1 million, down $26.4 million from 2009. The quarterly dividend was raised from $0.20 to $0.25.

"We are increasing our 2010 estimate to $4.40, previously $3.90, and boosting our 2011 view to $4.90, previously $4.30. The 4Q will be a tougher comp, F/X will be a negative $0.17 in the second half; organic sales performance is truly best-of-class," Ramey says.

"Herbalife’s shares remain at a bargain valuation of only a shade over 10 times our 2011 estimate. We are increasing our price target to $75, previously $62, or 15.3x our 2011 EPS estimate. We reiterate our buy rating."

See more of what analysts and money managers have to say, and get the latest financial news. Watch Squawk on the Street every weekday morning starting at 9 a.m. ET.

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  • Carl Quintanilla is an Emmy-winning reporter and co-anchor of CNBC's "Squawk on the Street," broadcast live from the NYSE.

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