Blackmores Limited reports monster growth: What you need to know

Credit: Blackmores

The Blackmores Limited (ASX: BKL) share price has risen more than 2% today after the vitamins business reported its half-year earnings results.

What Happened?

Indeed, Blackmores was one of the best performing shares on the ASX in 2015. From roughly $35 at the beginning of the year, the share price rose as much as 528% to a high of $220.90 on the back of soaring sales and earnings results. Shares have since pulled back, although they’re still sitting almost five-times higher since the beginning of 2015 at $168.50.

Source: Yahoo! Finance – Blackmores' two-year share price chart

Source: Yahoo! Finance – Blackmores’ two-year share price chart

The results released by the group today highlighted exactly why Australian investors fell in love with the shares. For the six-month period ended 31 December 2015, revenues rose 65.5% to $341.4 million, earnings before interest and tax (EBIT) rose 144.9% to $69.1 million (an EBIT margin of 20.2%) while net profit after tax (NPAT) soared 159.5% to $48.3 million.

It also ended the period with $42.9 million in cash versus $20 million in long-term debt and declared a $2 dividend per share (fully franked). That represents a 194% increase compared to the prior corresponding period.

At first glance, it appears that Australian sales accounted for most of Blackmores’ growth during the period, given that sales rose 73% while EBIT more than doubled to $63.6 million. In a small note below those segment results however, the company said (emphasis added):“Australia segment revenue for the half-year ended 31 December 2015 includes the benefit of sales made to Australian customers which we believe are ultimately intended for Asian Markets.”

While those sales to Asia were indirect, direct Asian sales also rose nearly 73% to $60.9 million with segment EBIT up 234%, albeit off a much lower base to $5.8 million.

Indeed, this growth is very exciting for shareholders of Blackmores, as well as those who own shares of Bellamy’s Australia Ltd (ASX: BAL) and a2 Milk Company Ltd (Australia) (ASX: A2M). China is a huge market where demand is only expected to grow further for vitamins and baby formula, which Blackmores recently expanded into.

In saying that however, this is also a risk investors need to be aware of. As highlighted by The Australian Financial Review today, fund manager Geoff Wilson sold his shares of Blackmores and A2 Milk this week based on their vulnerability to a potential “crackdown” on ‘grey market’ sales in China. Grey market sales are those products which are purchased in Australia and then resold by consumers to Asian residents.

What happens now?

A crackdown is by no means guaranteed, but China may choose to do so in order to lower the risk of counterfeit products and the avoidance of duties. Of course, these companies also sell a lot of goods to China legitimately and those sales would presumably be safe, but indirect sales could still take a hit nonetheless.

This risk isn’t a reason to avoid the shares like a plague, but investors certainly need to be cautious not to overexpose themselves in case it does come to fruition. As it is, the shares aren’t cheap, per se, but are certainly worth keeping an eye on – particularly if the share price falls any further than its current level.

Our BEST stock idea for 2016 - FREE!

Our top analysts have recently selected their TOP stock idea for 2016, and with share prices falling, it could be the BEST time to buy! This relatively unknown technology share is growing rapidly and offers a fat, fully franked dividend! Best of all: their top stock idea for 2016 is yours FREE! Just click here, enter your email address and claim your free report - no payment or credit card required!

Motley Fool contributor Ryan Newman owns shares of Bellamy's Australia. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.