http://www.smh.com.au/business/retail/is-blackmores-a-share-bubble-20160129-gmgs6e.html
Is Blackmores a share bubble?
Date
January 29, 2016
Graham Witcomb
Intelligent Investor
The zeal for natural health and China's appetite for vitamins has led Blackmores shares skyrocket over the past two years.
The zeal for natural health and China's appetite for vitamins has led Blackmores shares skyrocket over the past two years. Photo: Peter Rae
Blackmores' stock has risen a staggering 1268 per cent over the past ten years. For eight of those years, the stock went practically nowhere, then rose tenfold in the space of two.
A chart of the vitamin maker's share price looks eerily like a hockey stick.
Blackmores earned $535 million in revenue in the 12 months to September 2015, compared to $326 million annual sales in 2013. Few companies can brag about a 64 per cent increase in revenue over two years – fewer still can say it led to a 157 per cent increase in net profit.
Gains like that justify at least some of the jump in the share price. Most of it, however, comes down to investors' rising expectations for future growth.
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With one of the most trusted Australian brands under its belt, the company is expanding aggressively into Asia.
Asian consumers already account for around 30 per cent of its sales. Add the new Australia-China free trade agreement to the equation and China may well become an even bigger honeypot due to a reduction of import tariffs.
Blackmores is a well-managed company, has a clean balance sheet and we have every reason to believe the business will be bigger and stronger a few years from now.
But, even with all it has going for it, is it really possible for Blackmores to be worth 10 times what it was as recently as 2014? Call us sceptical.
Share prices are based on perceived future growth rates, and the simple fact is that Blackmores investors today are paying for an extremely rosy outlook.
We need look no further than Blackmores' own history to see what happens when sentiment changes.
In February 2007, Blackmores' stock hit $21 following a 67 per cent rise in the space of seven months as investors began to see the company's growth potential. Seven years later, in February 2014, the stock was still at $21.
But here's the kicker – in those seven years, Blackmores' revenue more than doubled and operating earnings increased 55 per cent. Those cheerful early investors had been absolutely correct in their forecast for long-term growth.
They just overstretched when they paid up for it.
Blackmores' earnings per share have risen 13 per cent a year over the past five years. Even if that rate were to continue for another five years, investors would still lose money if the company's current price-earnings ratio of 57 reverted to its five-year average of 26.
It would be even worse if the company fell to the price-earnings ratio of the consumer staples sector as a whole, which is currently 20 times earnings.
Blackmores has had a tremendous couple of years, operationally and in terms of its share price. But, as you have probably read ad nauseam, past performance doesn't guarantee future results.
Is Blackmores' share price a bubble ready to pop, or an accurate estimate of its future cashflows?
The better question is whether there's room for error. When it comes to Blackmores, you can bet your boots there isn't.
Graham Witcomb is an analyst with Intelligent Investor. This article contains general investment advice only (under AFSL 282288). Authorised by Alastair Davidson. To unlock Intelligent Investor stock research and buy recommendations, take out a 15-day free membership.
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