Are Bellamy’s Australia Shares a Bargain?

For those of you watching the markets last year you’re probably familiar with Bellamy’s Australia [ASX:BAL]. But for those who are unaware, Bellamy’s was a standout stock for 2015. We even had many subscribers here at Port Philip Publishing make a killing off our Bellamy’s recommendation. And when I say ‘our recommendation’ I mean Sam Volkering’s. Sam is the editor of Small-Cap Investigator and Revolutionary Tech Investor. And his recommendation made a lot of his subscribers a nice bit of coin to end 2015.

Last year Bellamy’s shares made amazing 724.85% returns for investors. The dramatic share price rise was largely due to their continual profit increases. Bellamy’s revised profits up twice in latter half of 2015. And it was all thanks to increasing sales over in China.

However, recently Bellamy’s has fallen out of favour with most investors. They treated Bellamy’s as a get rich quick stock. And now they believe all that is to be had from Bellamy’s is already gone. Some investors are even going as far as to short sell Bellamy’s. Why? Because they don’t want to invest in anything associated with China.

I think this is a ridiculous idea. Bellamy’s financials are still quite strong. And they are experiencing strong demand coming from China. This is exactly the conditions that put Bellamy’s in the limelight. Yet the BAL share price has fallen quite substantially this year. Bellamy’s shares are down more than 32% in just four months.

So, is it time to buy?

Bellamy's share price 06Apr16

 

It’s hard to say. While potential growth is definitely still there for Bellamy’s, do shares need to come down further for it to be attractive?

As I stated before, Bellamy’s share price has already dropped more than 32%. And of course this drop isn’t all because of short sellers. It would be foolish to think that a stock gaining over 700% that there wouldn’t be shareholders selling out to crystallise profits. Yet it begs the question, has Bellamy’s share price fallen enough?

Dairy inventories in China are falling

Some believe the Australian dairy industry has just finishing off its short-lived run. They think the level of buying from China will slow down. And therefore Bellamy’s and other related dairy companies aren’t a great investment.

They are correct about one thing. China did increase their dairy consumption quite recently. The 2013–2015 period was considered a peak for the Australian dairy industry. And all this buying led to a backlog of inventory in Chinese warehouses.

In October last year Macquarie estimated current Chinese inventories at 300,000 tons. ‘The key catalyst for whole milk powder prices in the near term will be the clearing of inventory in China,’ the bank said.

But the USDA’s Beijing bureau said that the expectation of higher imports in 2016 reflects the ideas of ‘Chinese dairy companies [to] draw down carryover stocks through the end of 2015.’ What does this mean? China might be expected to consume vast amounts of stock very quickly.

Another driver for milk related powders is the lack of refrigerated supply chains in China. The main consumption areas in the south and east are encouraging the use of powdered milk products. And Australia might soon take over the US as third leading supplier to China for milk related powders.

All good signs so far for Australia’s dairy industry.

Bellamy’s Strong Financials

While it is good to identify macro trends, it’s also important to focus on the micro factors. And what I mean by this is Bellamy’s financials. Bellamy’s release their first half report for FY16 in late February.

Bellamy’s was still able to boast impressive figures. Revenue was up 83.3% to $105 million, and net profit after tax jumped a staggering 325.3% to $13.66 million.  Bellamy’s also stated in the report China continues to exhibit strong growth for Australian made products. And in Singapore they were able to double their market share.

However since Bellamy’s posted their results, global turmoil has placed havoc with their share price. And of course there are risks associated with the baby formula company.

As it stands, Bellamy’s still do not own one cow. The whole production of Bellamy’s products are not done by themselves. They’ve had to overcome supply squeezes in the past.  But their new production agreement with Fonterra [NZE:FCG]  has helped sales. And it has helped reduce Bellamy’s reliance on manufacturer Tatura.

So of course investing in Bellamy’s has its risks. But the way I see it, prices are depressed for a company with great earnings potential. And the possibility of a pickup in China’s dairy imports is very possible.

Harje Ronngard,
Junior Analyst, Money Morning

PS: Bellamy’s was a great investment for 2015. And if prices keep dropping they could also be another great investment for this year. However Bellamy’s wasn’t the only great stock last year. There were in fact dozens of great investments you could have made last year. And all of them yielded triple digit returns for those who took the opportunity.

According to Money Morning’s Publisher, Kris Sayce, there are three great investments this year. In fact they were great investments last year and are continuing over to 2016. Kris has written a report all about it called ‘The Three Best Investments in Australia for 2015 and Beyond’.

In his article Kris will tell you why it’s time to load up on the most hated Aussie sector. And there’s also a tip on how to buy Aussie property on the stock market. To get all this information and more check out Kris’s report. To get your free copy, click here.

 


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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