Shares in Blackmores Limited (ASX: BKL) are down again today, increasing their losses for the week to 23% following on from a hefty 17% loss yesterday. A surprising fall, in the context of a 115% increase in profit, it seems shareholders were put off by the news of a soft start to 2017.
Management expects sales for the first quarter of 2017 to be below those achieved in the first quarter last year. Blame was pinned on retailers destocking and changes in the purchasing practices of exporters. Management have stated that they expect sales to improve later in the year.
However, the market was clearly wondering if there might be more to the story than management let on. Underperformance in the Korean market could have spooked investors, while the company's nascent baby formula joint venture with Bega Cheese Ltd (ASX: BGA) delivered just $9 million worth of sales – of which $4.5 million is net to Blackmores.
It is early days yet, but $9 million is just a drop in the bucket compared to the combined ~$500 million in formula sales generated by Bellamy's Australia Ltd (ASX: BAL) and a2 Milk Company Ltd (Australia) (ASX: A2M) during the past year. Infant formula was perceived as a key growth area by the market, but the competition is already well established, and several steps ahead of Blackmores.
C'mon… just tell me if shares are going to fall below $100!
I have no idea. In recent times, Blackmores shares have tended to overshoot both on the way up and the way down, as a result of their relatively limited amount of shares on issue (just 17 million, a significant chunk of which are held by management). If the sales outlook hasn't improved by the Annual General Meeting at the end of October, I'd say it's quite possible shares will fall that far.
If they did though, I would consider buying up big. At today's prices, Blackmores trades on around 28 times its full-year earnings, which is expensive if sales are slowing – this is why shares dived this week.
Yet the company carries barely any debt and has an interest cover (Earnings Before Interest and Tax divided by finance costs) of 80 times – nearly triple that of blue-chip stalwart CSL Limited (ASX: CSL). This means that not only is the company very financially stable, it's also got plenty of room to expand by acquisition if the right opportunities arise.
Competition is fierce yet sales over a variety of markets are recurring and there's room for upside if demand increases, since Blackmores recently doubled its production capacity. Wherever shares head to from here, I wouldn't be overlooking Blackmores.
