The Blackmores Limited (ASX: BKL) share price dropped 7.5% to $176.25 today and has now lost nearly 20% of their value since the start of this year.
Today, the company announced that it was not considering an acquisition of Nature's Care – despite news reports that executive chairman Marcus Blackmore said he would 'almost certainly' look at acquiring vitamins and supplements business Nature's Care.
Blackmores' share price has been on a tear over the past year, thanks to soaring sales, particularly from Asia. A year ago, the shares were priced at just over $40, but a number of positive announcements, soaring sales and profits and a rosy outlook have propelled the share price into the stratosphere.
Unfortunately, those investors buying in at the start of this year when the share price hit $220.90 have seen a significant fall in the holdings. A number of recent analyst reports have suggested the company is overpriced – despite the recent falls, Blackmores' shares still boast a trailing P/E ratio of over 65x according to Google Finance. That's expensive in anyone's language – even Marcus Blackmore thinks the market has overreacted.
And while the company may have outstanding prospects – at least in the next couple of years – the current price suggests that it would need high double-digit growth to continue for many years. The question is whether Blackmores can achieve that consistently, despite its recent announcement that it was entering the booming infant formula market in a joint venture with Bega Cheese Ltd (ASX: BGA).
The problem with comparing the current P/E ratio to the company's 5-year historical ratio of around 22x is that today's Blackmores is quite a different company to the one even from a year ago. Blackmores may well find itself struggling to keep up with demand for baby formula as market leader Bellamy's Australia Limited (ASX: BAL) has previously found.
Recent reports from China suggest as many as 80% of the baby formula brands available will disappear from market shelves thanks to a crackdown on local suppliers by Chinese authorities – meaning more opportunities for overseas suppliers such as Bellamy's and Blackmores.
Foolish takeaway
Blackmores has a habit of consistently surprising me, but even at today's price, shares appear expensive. I wouldn't be buying, but then again if I was holding, I certainly wouldn't be selling.
