William Ackman's high-profile attack on Herbalife doesn't seem all that convincing.
NEW YORK (TheStreet) -- By now, if you haven't heard of Herbalife's (:HLF) products, you've heard a lot about the stock as well-known hedge fund manager William Ackman recently shared his bearish views in great detail.
You can find the presentation and slides at factsaboutherbalife.com.
I read the presentation and listened to Mr. Ackman state his case. I wasn't convinced and finished with the impression that I just read a "hit piece" relying more on emotion than logic.
I understand why many people don't like network marketing. I am one of them. I can't tell you how many times I have been approached about a "business opportunity." I have even received a card from a young lady selling Amway products in Beijing (I kept that card).
But even though I have no desire to join a network marketing program, it's advantageous for some people to do so.
Also, the low success rate of Herbalife representatives that Mr. Ackman presents as damning evidence isn't that different from those in other fields.
For example, the percentage of insurance salespeople who make more than $100,000 a year is probably similar to the percentage of successful Herbalife representatives.
Most people know the odds are against a new insurance salesperson, but that doesn't stop companies from letting prospective agents know the "incredible income potential" available.
Usually a person must become licensed before selling insurance. To become licensed, they often must attend and pay for a week or more of classes. All things being equal, the cost to test an individual's entrepreneurial fortitude is much lower with Herbalife than it is with insurance sales.
Same holds true for another popular self-employed sales job, the real estate agent. For most new agents, the start-up costs are much greater than they are with Herbalife. I doubt that more than 1% of new agents go on to have other agents working for them and make more than $100,000 a year.
The odds of success in starting a small business are low, especially for people with limited financial resources. This is true for network marketing and most other businesses. Success in sales is not easy for most people, and the product is not nearly as significant as the salesperson's attitude.
I selected a few noteworthy slides that attempt to paint Herbalife and independent contractors in an unusual light relative to other businesses practices.
Slide 102 states, "In Canada, distributors must pass through 14% of sales taxes in addition to the surcharge to capture full Retail Profit." Well yes, that goes for any product sold at retail. There is nothing unusual or out of the ordinary for a business to collect sales tax in order to realize a full retail markup. In most businesses, paying for shipping of the product is part of the expense of doing business.
Slide 9 displays 2011 Herbalife sales at $5.4 billion, but Slide 11 asks, "Has anyone ever purchased an Herbalife product?" Did the person who made slide 11 read 9? When I read a company is selling billions of dollars of product annually, I don't have a need to ask whether anyone is buying, I already know they are. The person who made slide 11 further demonstrates a lack of situational awareness by not knowing the key brand of Herbalife (hint, Herbalife).
Slides 13 & 14 illustrate that Herbalife doesn't have a ready-to-drink offering of its top selling product, although competitors do. My takeaway from the slide is that Herbalife has greater revenue potential if they add a ready-to-drink product. If I were a potential/current supplier to Herbalife, this is exactly the type of sales presentation slide I would use to demonstrate more opportunity.
Other than displaying product pricing power for Herbalife, I am unsure what else can be taken away from Slides 14 through 23. People are willing to pay more for Herbalife's products. There's nothing new here; many companies are able to sell their products at a premium over competitors.
Apple (:AAPL) and Research In Motion (:RIMM) are two well-known product makers, but one sells its products at a premium over the others'.
The examples used in Slide 23, Walt Disney (:DIS) and Nike (:NKE) also support the concept that some companies are able to charge much higher for their products than others.
The presentation appears to be more sleight of hand than anything of real substance. Do most new distributors end up having anything to show for their efforts beyond a credit card bill and an experience? Probably not, but that's par for the course for almost all newly minted self-employed business people.
As a short-term trade, I sold volatility with a long bias based on technical analysis of the chart pattern and the high option premium. Herbalife is oversold in my opinion.
Is Herbalife a good investment? With a forward yield of more than 4% and a single-digit forward price-to-earnings ratio, it's compelling.
Ackman alleges that Herbalife is an illegal organization, so some investors might think a significant downside risk is that the government could shut it down.
But I don't think the downside risk reasonably includes a forced shutdown by the government.
Of course, forced changes in compensation, rules, recruiting as a result of government demands are always a real possibility, but it's hard to argue that such business model adjustments are not already priced in.
I respect Mr. Ackman, and if he states a company is worth zero, I pay attention. You ignore him at your peril, as many Herbalife investors now realize.
But he also has people making slides questioning whether anyone has bought products from a company that generates more than $5 billion a year in sales.
Maybe the chances of Herbalife falling to zero next year are about as low as those of a new contractor making more than $100,000.
At the time of publication, Weinstein was long HLF.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.