Shares of Herbalife Ltd. stock surged more than 9% Monday after the company said its new accounting firm made "no material changes" after re-auditing three years of the company’s financial statements.
The new audits were required because KPMG resigned as Herbalife’s auditors this year after the partner who had overseen the company’s audits admitted to insider trading in Herbalife stock.
PricewaterhouseCoopers re-audited Herbalife’s financial statements from 2010, 2011 and 2012. KPMG had withdrawn its approval of those filings after partner Scott London admitted to an insider-trading scheme involving Herbalife shares.
Herbalife said in a statement that KPMG’s resignation had nothing to do with the company’s financial condition or the accuracy of the audits.
Shares of Herbalife jumped $6.45, or 9.4%, to $74.83 on word of the new, clean audits.
Analysts have said that Herbalife may begin an aggressive stock repurchase after PricewaterhouseCoopers approves its past statements.
Tim Ramey, a D.A. Davidson & Co. analyst, said the newly approved audits provide additional evidence of the company's financial health. He said he expects the stock to be trading for $115 a share in 18 months and $150 a share in five years.
"This has paved the way for Herbalife to have a growth stock valuation," Ramey said Monday in a research note.
Herbalife, a Los Angeles maker of nutrition products, has been one of the most scrutinized companies on Wall Street this year. Last December, hedge fund manager Bill Ackman accused Herbalife of operating a pyramid scheme and said he expected regulators to shut the company down. He said he bet $1 billion that the company’s stock price would fall.
The stock plummeted on Ackman’s allegations but has soared 127% this year. Ackman trimmed some of his short position. He said he was not swayed by the new audits.
"Every public company that turned out to be a fraud had audited financial statements," Ackman said.
Ackman said he believes the company inappropriately rewards its independent sales people for recruiting others into the business. The company’s top-paid distributors make most of their money from recruiting as opposed to selling the company’s products, Ackman said.
"It is not the role of Herbalife’s auditor to determine if the company is a pyramid scheme," Ackman's fund, Pershing Square Capital Management, said in a statement. "Rather, that determination depends on whether distributors earn more from recruiting new distributors than from retail sales to consumers who are not distributors. The few Herbalife distributors that make money earn the vast majority of their profits from recruiting. Herbalife is a pyramid scheme that will be shut down by regulators."
Herbalife has denied those allegations, saying its business model is legal and is used by many other companies.
London, who has pleaded guilty to insider-trading charges, admitted giving a stock-trading friend advance notice of Herbalife’s financial statements – as well as those of other KPMG clients – before they were released to the public. London’s friend, Bryan Shaw, who made more than $1 million in illegal trading profits, has also pleaded guilty. Both men are scheduled to be sentenced in January.
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