Blackmores’ stock has risen 1,268% over the past ten years. We’re pretty sure the supplement maker now has a bigger fan following than Adele.
What troubles us is that for eight of those years the stock went practically nowhere, then rose 10-fold in the space of two (you can guess which two). A chart of Blackmores’ share price looks eerily like a hockey stick.
Blackmores earned $535m in revenue in the 12 months to Sept 2015, compared to $326m in 12 months to Sept 2013. Few companies can brag about a 64% increase in revenue over two years – fewer still can say it led to a 157% increase in net profit due to the inherent operating leverage in manufacturing vitamins. So that justifies at least some of the jump in valuation.
Most of the jump, however, comes down to rising expectations for future growth. 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% of sales. Add the new Australia-China free trade agreement to the equation and China may well become an even bigger honeypot than Australia 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? Colour us sceptical.
Share prices are set based on perceived future growth rates, and the simple fact is that 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% 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%. Those cheerful early investors had been absolutely correct in their forecast for long-term growth. They just overstretched when paying for it.
Blackmores’ earnings per share have risen at 13% 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. Worse still would be for it to reach the current PER of 20 for the consumer staples sector as a whole.
Blackmores has had a tremendous couple of years, both operationally and in terms of its share price. But, as you have probably read ad nauseam by now, past performance doesn’t guarantee future results.
Is Blackmores’ share price a bubble ready to pop or an accurate estimate of its future cashflows? As value investors, the question that really matters is whether there’s room for error. And when it comes to Blackmores, you can bet your boots there isn’t.
To get more insights, stock research and BUY recommendations, take a 15 day free trial of Intelligent Investor now.