Shareholders in Blackmores Limited (ASX: BKL) are suffering from a big indigestion with the share price of the vitamins company tumbling to a four-month low on the back of its profit results.
The stock is down 14% to $137.19 during lunch time trade after management unveiled a 20% uplift in first half net profit to $34 million on the back of a 9% increase in revenue to $287 million. The company even increased its interim dividend by 15% to $1.50.
But Blackmores became the latest victim of great expectations and its new chief executive Richard Henfrey's efforts to build a more consistently performing company is still a work-in-progress.
Scratching beneath the headline figures reveals a number of near-term challenges that Blackmores will need to overcome.
These include a shortage of key ingredients like fish oil and whey protein, increasing competition in China and weakness in the Australian and New Zealand (ANZ) market.
Sales in ANZ dipped to $121 million in the six months to end December 2017 due to subdued market conditions and as its direct sales to China cannibalised local sales to "dai-gous" (private agents based in Australia who would buy and send products to China).
Management said this is a good thing as it lessens its dependence on any one channel or brand – and you only need to remember what happened to Bellamy's Australia Ltd (ASX: BAL) to appreciate this point.
What's more, cost cutting helped generate a 19% increase in Blackmores' earnings before interest and tax (EBIT) for its ANZ business.
Interestingly, the opposite happened for its China operations where revenue jumped by an impressive 27% although earnings only inched up 4% due to investment in resourcing and higher operating expenses as the company expanded its reach into that market.
What's perhaps more alarming is the fact that Blackmores is having difficulty in collecting payment from its Chinese partners as the company increased its doubtful debt provision by $2.8 million.
Overall it isn't a bad result but there will be some questioning if Blackmores can consensus forecasts for a 33% increase in adjusted earnings per share (EPS) for FY18.
It doesn't help that Blackmore is trading on a FY18 price-earnings multiple that is over 30 times. Stocks trading at such a premium cannot afford to cast any doubts on their robust earnings growth profile.
The stock was up over 50% over the past 12 months before today's crash, which took its share price gain to 32% compared with the 2% plus gain by the S&P/ASX 200 (Index:^AXJO) (ASX:XJO).
On the other hand, other China-dependent food supplements companies have enjoyed significantly stronger share price rallies. Bellamy's is up 227% while market darling a2 Milk Company Ltd (ASX: A2M) is up a whopping 459%!
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