Why the Blackmores share price fell 7.5% today

Blackmores Limited (ASX:BKL) share price has tumbled 20% in 2016

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The Blackmores Limited (ASX: BKL) share price dropped 7.5% to $176.25 today and has now lost nearly 20% of their value since the start of this year.

Today, the company announced that it was not considering an acquisition of Nature's Care – despite news reports that executive chairman Marcus Blackmore said he would 'almost certainly' look at acquiring vitamins and supplements business Nature's Care.

Blackmores' share price has been on a tear over the past year, thanks to soaring sales, particularly from Asia. A year ago, the shares were priced at just over $40, but a number of positive announcements, soaring sales and profits and a rosy outlook have propelled the share price into the stratosphere.

Blackmores share price chart
Source: Yahoo Finance

Unfortunately, those investors buying in at the start of this year when the share price hit $220.90 have seen a significant fall in the holdings. A number of recent analyst reports have suggested the company is overpriced – despite the recent falls, Blackmores' shares still boast a trailing P/E ratio of over 65x according to Google Finance. That's expensive in anyone's language – even Marcus Blackmore thinks the market has overreacted.

And while the company may have outstanding prospects – at least in the next couple of years – the current price suggests that it would need high double-digit growth to continue for many years. The question is whether Blackmores can achieve that consistently, despite its recent announcement that it was entering the booming infant formula market in a joint venture with Bega Cheese Ltd (ASX: BGA).

The problem with comparing the current P/E ratio to the company's 5-year historical ratio of around 22x is that today's Blackmores is quite a different company to the one even from a year ago. Blackmores may well find itself struggling to keep up with demand for baby formula as market leader Bellamy's Australia Limited (ASX: BAL) has previously found.

Recent reports from China suggest as many as 80% of the baby formula brands available will disappear from market shelves thanks to a crackdown on local suppliers by Chinese authorities – meaning more opportunities for overseas suppliers such as Bellamy's and Blackmores.

Foolish takeaway

Blackmores has a habit of consistently surprising me, but even at today's price, shares appear expensive. I wouldn't be buying, but then again if I was holding, I certainly wouldn't be selling.

Motley Fool contributor Mike King has no position in any stocks mentioned. You can follow Mike on Twitter @TMFKinga Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Bellamy's Australia. 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 Bruce Jackson.

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