Blackmores Share Price Drops 5% on Baby Formula Fall Out

Vitamin business Blackmores Ltd [ASX:BKL] fell as much as 5.2% this morning, to $129.87 per share.

What happened to Blackmores Share Price?

There has been a falling out between two recognised Aussie brands. In October 2015, Blackmores and Bega Cheese Ltd [ASX:BGA] said they would partner up to capitalise on Chinese demand for baby formula.

In a market announcement, Blackmores noted:

Blackmores and Bega are iconic Australian brands and share a long history of producing quality products. Together we have highly complementary experience, Blackmores in health and nutrition and Bega in dairy manufacturing. This experience is matched by the strong alignment on sustainable sourcing and ingredients traceability as well as shared corporate values.

At the same time, investors had bid Bellamy’s Australia Ltd [ASX:BAL] up from $1.69 to $8.02 per share from January to November. The baby-formula company would continue its climb in 2015, reaching a high of $14.52 per share in December, up 759% for the year.

Yet now, it seems Blackmores and Bega have come to a mutual agreement to scrap their joint-venture. As reported by The Australian Financial Review:

Blackmores chief executive Richard Henfrey, who took over from long-serving boss Christine Holgate in August, said it had been a mutual decision by the two companies to scrap the underperforming joint venture. It had been announced with much fanfare in late 2015 but has been a big disappointment, having suffered losses of $14 million in 2016–17.

Mr Henfrey said provisions on inventory and other items in the full-year accounts wouldn’t need to be added to as the venture is unwound. He said there had been major changes in the infant formula market in the past two years and it hadn’t been able to deliver.

What now for Blackmores?

Blackmores will still sell baby formula under their own brand. However, it will only be a small fraction of their operations, Henfrey said.

On 26 October, Blackmores revealed their first-quarter results for FY18. Net sales were up 9.3%, to $133.5 million, and net profit was 24.9% higher at $15 million.

Sounds great, right? Perhaps. But the stock is trading on a price-to-earnings ratio of 38-times. It’s very steep. However, if Asian demand increases further, investors may not feel too bad about buying in at 38-times earnings.

Cheers,

Härje Ronngard,

Junior Analyst, Money Morning

PS: Want to find more stocks that could potentially rocket up in a matter of months? Check out these three small-cap stocks trading on the ASX right now.


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