It doesn't matter how much doctors and nutritionists may decry supplements, they are popular and people want to believe in them. That has underpinned good growth in a sector with none of the patent worries of pharmaceuticals and minimal FDA interference. It has also led to solid stock market performance for traditional store-based retailers like Vitamin Shoppe (NYSE:VSI) and GNC (NYSE:GNC) as well as multi-level marketing firm Herbalife (NYSE:HLF). (For help on choosing stocks, check out How Investors Can Screen For Stock Ideas.)

TUTORIAL: Investing 101

Growth in a Bottle in Q2
Herbalife continues to rack up impressive growth. Revenue rose 28% in the second quarter, with organic growth on the order of 20%. There are several metrics that investors can use to evaluate the underlying momentum of Herbalife's business and regional volume points is one of them. By this standard, volume rose more than 17% in the second quarter, with exceptionally strong growth in Asia-Pacific, Mexico, and Central/South America. Results in North America and Europe were more sedate (mid-single digit growth), while the China numbers were actually down about 9%. Overall reported revenue from China was flat, though.

Herbalife maintains an interesting bifurcated margin structure. Gross margin is impressive at over 80%, and Herbalife reported that it grew about 40 basis points this quarter. Operating margin, though, is more modest in the high teens, but still grew 50 basis points this quarter, as operating income jumped nearly 32%.

A Stealth Emerging Markets Play?
Herbalife is quite clear in laying out where it earns its revenue and profits, but that does not mean that regular investors pay all that much attention. To most Americans, I suspect Herbalife is just another nutritional supplement company that advertises on TV and sells some weight loss products. Maybe a few more people know about its distribution strategy.

What casual observers may not realize, though, is that about 80% of the company's sales come from outside the U.S. China in particular has been a healthy growth market and the company has gotten good traction with its "Nutrition Clubs". It's also noteworthy that Herbalife's products are not particularly cheap in these emerging markets, but the notion of improving one's health through supplements seems to really resonate.

Herbalife is holding up well under competition. USANA Health Sciences (NYSE:USNA) does overlap in some of Herbalife's overseas markets, but does not boast the same sort of revenue growth. Otherwise, Herbalife competes against some large overseas OTC companies like Hypermarcas and a host of smaller players and traditional providers.

People Want What They Want
Weight management products are a significant part of Herbalife's sales and that does not seem likely to change. Weight Watchers (NYSE:WTW) may have the studies to back up its approach, but that doesn't mean it appeals to all potential customers - ditto for Nutrisystem (Nasdaq:NTRI). Given that the FDA seems very uncomfortable with pharmaceutical-based approaches from the likes of Vivus (Nasdaq:VVUS) and Arena (Nasdaq:ARNA), it looks like Herbalife can continue to benefit from a market with a lack of convenient alternatives.

The Bottom Line
If Herbalife can maintain this kind of growth, the shares are almost certainly too cheap. The trouble is, though, that the record of companies like Herbalife is not very good - companies like this have repeatedly emerged, posted stellar growth, and then flamed out. It's absolutely fair to point out that just because it happened to others does not mean it will happen to Herbalife, but it should lead investors to take in a little more skepticism into their projections and valuation analysis. (To help you discover if this stock is right for you, read Cheap Stocks Can Be Deceiving.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  7. Stock Analysis

    Analyzing Porter's Five Forces on Under Armour (UA)

    Learn about Under Armour and how it differentiates itself in the competitive athletic apparel industry in light of the Porter's Five Forces Model.
  8. Stock Analysis

    The Biggest Risks of Investing in Qualcomm Stock (QCOM, BRCM)

    Understand the long-term fundamental risks related to investing in Qualcomm stock, and how financial ratios also play into the investment consideration.
  9. Stock Analysis

    The Biggest Risks of Investing in Johnson & Johnson Stock (JNJ)

    Learn the largest risks to investing in Johnson & Johnson through fundamental analysis and other potential risks. Also discover how JNJ compares to its peers.
  10. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  1. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  2. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  3. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  4. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  5. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
  6. What is the formula for calculating earnings per share (EPS)?

    Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, ... Read Full Answer >>
Trading Center