After falling 26% so far this year, does the Blackmores Limited (ASX: BKL) share price represent a good buying opportunity for ASX investors?
Here's a closer look at the company's background and financial performance.
What does Blackmores do?
Blackmores is a supplier of natural health products to pharmacies, retailers and distributors in Australia, New Zealand and Asia. The company also engages in development activities to improve existing products and formulate new offerings. The company has a range of brands for various health applications.
How has Blackmores performed recently?
Blackmores has experienced massive growth in recent years but its share price has been punished for earnings downgrades in 2019. Profits for the nine months to March 2019 were down 14.3% on the same period in the prior year, and the company did not expect the second half of the financial year overall to be better than the first.
Despite the drop in the Blackmores share price, there is upside potential that should be considered. Blackmores management has promised to cut costs by $60 million over 3 years. Considering that full-year net profit in the 2018 financial year was $70 million, an additional $20 million per year should be enough to buoy profits back to this level and above.
With a grossed-up dividend yield of 4.7%, Blackmores offers a healthy return while investors wait for earnings growth to resume. So far the company has matched its 2018 financial year dividend in the 2019 financial year. The company has maintained a payout ratio above 70% for the last 10 years.
With a current price-to-earnings (P/E) ratio of 22.73x, Blackmores trades at a premium to the ASX 200. This valuation is justified when considering that Blackmores grew net profits from $25 million in 2013 to $70 million just five years later in 2018.
While earnings have been downgraded, Blackmore's management has confirmed that revenue growth is expected for the full 2019 financial year. This means that while some costs may have picked up, the company is still generating more business than before. As cost-cutting measures kick in, some of this revenue will be converted to profit. Investors should be able to expect that the company will succeed in returning its profit margin to the level seen in 2018, at more than 11%.
Blackmores also had a debt-to-equity ratio above the broader market at 52% at the end of 2018, but it can maintain this well with interest cover of 22.5x in 2018. When considering that Blackmores is growing revenue and can comfortably meet its interest obligations, it is easy to see past this debt level.
Is it a buy?
Despite the earnings downgrade, Blackmores has seen massive profit growth in recent years and, with revenue increasing, this can be expected to resume soon. I believe that the current dip in the Blackmores share price created by profit downgrades offers a good buying opportunity.
