Controversy Aside, How to Play Herbalife Earnings

By Andrew Keene  FEB 19, 2013 3:17 PM

The stock looks likely to rally higher.

 


In the shadow of Carl Icahn and Bill Ackman's public spectacle, one could almost overlook today's earnings report from Herbalife (NYSE:HLF), with analysts estimating EPS of $1.01 from $1.05 billion in total revenue. 

Last December, Ackman revealed a billion dollar short position in Herbalife on CNBC. Then last Thursday, regulatory filings revealed Carl Icahn owns 14 million shares of the company, or a nearly 13% total stake.

The recent controversy aside, analysts have been bullish on the stock, raising their estimate for Q4 2012 EPS by $0.02 and $0.10 for 2013.  While earnings numbers may be positive, this will not be enough to convince bearish investors who feel such numbers aren't a reflection of the company's true reality.  On the conference call, look for Herbalife to update investors as to any change in the trend of negative publicity, planned steps to improve transparency, and updates on how aggressively the company will buy back stock.

The at-the-money (ATM) straddle in HLF is $4, implying the stock will either move up or down $4 on earnings, so I want to place a trade on the measured move target

07/31/12   $51.69   $54.89  $+3.20 (6.2%)
05/01/12   $70.32   $56.30  $-14.02 (-19.9%)
02/22/12   $62.46   $66.81  $+4.35 (7.0%)
11/01/11   $62.36   $58.03  $-4.33 (-6.9%)
08/02/11   $55.54   $58.70  $+3.16 (5.7%)
05/03/11   $90.25  $102.22  $+11.97 (13.3%)
02/23/11   $69.85   $76.90  $+7.05 (10.1%)
11/02/10   $64.95   $62.75  $-2.20 (-3.4%)

Historical Earnings Move: Mean 9.1%, Median 7.0%

NearTerm Straddle Indication:

Term  Strike       NBBO          Size      %Spot(Mid)
02/22  $39     $3.95 - $4.15     5 x 6      10.2%
02/22  $40     $3.85 - $4.15     8 x 89     10.1%

I think the stock will rally higher.

My Trade: Buying the HLF weekly 40-42.5 call spread for $.85
Risk: $85 per 1 lot
Reward: $165 per 1 lot; 2:1 reward vs. risk set-up
Breakeven: $40.85


No positions in stocks mentioned.