23 November 2019
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What was behind Blackmore's fall?

Andrew Main
13 March 2018

It’s not every day that a share price drops by $23.50 after an apparently supposedly upbeat half year result, but there was a fair bit more to Blackmores Ltd.’s recent interim results to suggest that there are still risks out there for the China-oriented group.

The stock dropped from $159.50 to $136 a share on February 22, despite the news that the complementary medicine group’s net profit after tax was up 20 % on the previous corresponding at $34 million, with group net sales up 9% at $287 million.

The interim dividend of $1.50, fully franked, was a 15 % improvement on the $1.30 paid out previously.

The share price has failed to bounce since, closing yesterday at $129.50. Bear in mind, if you will, that the stock price ran up to $175 a share in early January, so while it looks expensive, it is off $39 or almost 22 % below its peak.

Speaking historically, the stock ran up to $217.98 on the last day of December 2015, which smacks of window-dressing and short covering but it’s still a real number.

So what’s happened? FN Arena’s Rudi Filapek-Vandyck tagged the latest half year result as being one of the “notable disappointments” of the profit season, in amongst the naughty corner inhabitants such as Domino’s Pizza, Myer, QBE Insurance, Ramsay Health Care and Super Retail.

His main criticism seems to be that there was an earlier excess of optimism among investors and analysts about the China story, with Credit Suisse walking back, as they say in the White House, from a note in October putting a price target of $150 on the stock, up from $95 previously.

Perhaps they were just relieved that CEO Christine Holgate, poached by Australia Post during 2017, was quickly and efficiently replaced by Chief Operating Officer Richard Henfrey as of September 30.

The broker has now dropped its Blackmores recommendation from Outperform to Neutral and shaved $20 off the target price to $130 a share, half a dozen dollars below where it is now.

As Rudi put it, the Credit Suisse analysts had previously rated Blackmores’ growth prospects up there with the likes of Treasury Wines Estates and they  “now suggest Blackmores will still grow, but it won’t be at a spectacular rate.” “They also observe competitor Swisse seems to be performing better.”

Morgans has a Hold recommendation on the stock at current levels but has moved its price target up from $102.50 to $125.00.

They say the Blackmores brand is strong and is leveraged to favourable industry dynamics but is fully valued at these levels, that latter comment being what you say when your target is below the current share price.

So the only broker suggesting you buy the stock is retail specialist Ord Minnett which retains an “accumulate” rating and a sunnier target of $150 a share.

It says the half year net profit just reported was broadly in line with forecasts and that the long term demand profile of the company’s products and positioning of its brands is very strong.

A poke around the earnings numbers suggests that Blackmores is not enjoying anything like the straight-line sales growth that it enjoyed in 2013-5. The total reported sales of $287 million for the latest half were only a bit over 1% above the $283 million enjoyed in the first half of 2015-6.

And how’s this? Management’s claim of  “improved pricing stability and promotional rebates following the implementation of a program of reductions through the period” sounds a lot like a bit of calm following expensive promotion and price cuts.

It’s also worth remembering that Blackmores is a well-known name, but from my understanding doesn’t make any of its products in-house, so one of its key management issues is inventory. Too much, and it eats its head off in the warehouse, too little and the stockists start to scream.

“Continuity of supply has been a challenge in the second quarter as suppliers have struggled to respond to the Group’s increased requirements” is management-speak for what looks a lot like the latter circumstance.

The China numbers for the half were reassuring, with sales up 27 % to $74 million. This was despite the fact that many Chinese consumers now buy direct from Blackmores online, with their purchases not being counted in that $74 million number.

The best day is Singles Day in November 11, a sort of rebuttal of Valentine’s Day that celebrates young Chinese people’s single status. Blackmores offers 136 separate lines though the dominant e-commerce channel Alibaba and according to management, sales of Blackmores products on that day surpassed those achieved in the prior year after only two hours and 10 minutes.

You didn’t ask, but I gather 25 % of the lines handled by Alibaba are in vitamins, 11 % are fish oil and five % are anti-ageing. I leave the reader to speculate what the other lines are.



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