There has been a lot of negative publicity impacting the Blackmores Limited (ASX: BKL) share price over the last half year or so. This negative coverage has mainly centred around Blackmores’ disappointing FY19 results, which were largely linked to the company’s struggles in the Chinese market.
However, I think it is important to take a step back and look at the bigger picture. Despite some short-term issues, I feel that Blackmores is a solid company with a great future ahead of it.
Simple but effective business model
Blackmores develops, sells and markets more than 1,000 healthcare products including vitamins, minerals, herbal and nutritional supplements throughout retailers in Australia, New Zealand and Asia. It also sells a range of animal products.
Blackmores’ success is underpinned by its very strong brand. The company invests significantly in research, development, marketing and promotional support for retailers in order to maintain and grow its brand image.
Manufacturing costs are kept to a minimum as the ingredients it uses are often natural and sourced from other providers. Also, its distribution costs are kept low as its main sales channels are websites, pharmacies and retailers, enabling it to consistently generate strong free cash flows.
Disappointing recent financials
Blackmores’ recent financial performance hasn’t exactly been inspiring.
For the year ended 30 June 2019, Blackmores reported revenue of $610 million, only 1% higher than the prior period. Net profit after tax decreased by 24% to $53 million. Recent sluggish growth and ongoing issues in its China business segment were key reasons for this disappointing financial performance.
In the two weeks after Blackmore’s released these results, its share price dropped sharply from $83.26 to $69.05, a hefty 17% decline. Since then, the share price has recovered and is now trading at $87.60, but this is still well below its peak share price in 2019 of $130.47, which occurred last January.
As Blackmores’ future growth is heavily linked to China, there is an ongoing risk that the Chinese government may introduce legislation that could hinder Blackmores’ local Chinese sales channels.
Key export accounts and in-country sales fell 15% to $122 million in FY19. Changes in e-commerce laws that took effect from the beginning of 2019 and shifting consumer buying patterns were seen as major reasons for this sharp fall.
While Blackmores has a clear growth plan in place, a number of challenges remain in the short term. In its guidance for the year ahead, management expects profit for the first half to be lower than the prior corresponding period. Promisingly, however, management expects the second half to benefit from operational efficiencies due to its business improvement plan, which is projected to achieve $60 million in cumulative savings over 3 years.
I still believe that Blackmores is top quality company with good growth potential in China, despite its current issues there.
The Blackmores share price is still well below its 2019 peak, and even further from its all-time high of more than $200, reached 4 years ago.
I feel that Blackmores’ shares have been somewhat over-sold by the market, presenting a good buying opportunity for patient long-term investors.
However, if you are considering buying shares, I would recommend holding off until its first half-year 2020 financial results are released to get more clarity on the extent of the company’s issues in China.
The post Is the Blackmores share price a buy right now? appeared first on Motley Fool Australia.
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Motley Fool contributor Phil Harpur owns shares of Blackmores Limited. The Motley Fool Australia owns shares of and has recommended Blackmores Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020