It’s time for the second installment of the “Cramer eats crow” segment we started here on Mad Money just last week. This is the part of the show when Cramer admits that his loyal viewers were right about a stock – and he was wrong. Today, he’s talking about Herbalife.
You’ll have to forgive Cramer for jumping the gun on this one, but he’s a product of the Street – albeit an especially refined product – and traders usually look down their noses at “multilevel marketing” companies like Herbalife. These are businesses that have third-party manufacturers make their product and then act as distributors to individual consumers. Basically, they’re seen as little more than pyramid schemes.
But not so with Herbalife, which beat its first-quarter earnings estimates and delivered in-line guidance for Q2 that Cramer thinks it’ll top. The company was just approved in China for direct selling in two provinces as well. Herbalife has a high-margin business model and generates an enormous amount of cash, Cramer says, and you can tell it’s frustrated with its share price because it just authorized a $300 million buyback. On top of all this, Herbalife just rejected a $38-a-share bid from J.H. Whitney, a private equity group that’s already taken HLF private and public before.
Hats off to CEO Michael Johnson, who reduced the number of distributors HLF uses and turned it into a wellness company like Avon. Johnson was once an executive in The Walt Disney Co.’s video business, which was a huge success, Cramer says.
Herbalife sells at about a 10% discount to its peers based on this year’s earnings estimates despite the turnaround, and now that Whitney is dumping all its stock, Cramer sees this as an opportunity to get in at an artificially low price.
In case you’re worried about the legitimacy of Herbalife’s products, just know that the company maintains a real medical advisory board, chaired by doctors that monitor the business.
Cramer’s caveat: Don’t put in orders for this one before the open. The stock usually takes a bit of time before it starts trading, and he doesn’t want you in at a high price.
Bottom Line: Not all multilevel marketers are pyramid schemes. Some are legitimate and legitimately worth owning, like Herbalife.
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