News headlines recently have been dominated by the giant profit downgrade just issued by China-exposed baby formula business Bellamy's Australia Ltd (ASX: BAL), with its shares crashing around 40% after their return to the ASX boards this week.
The meteoric share price rise of Bellamy's shares from less than $1.40 to above $16 between 2014 and 2016 on the back of its gangbusters sales growth did not go unnoticed by rival foodstuffs businesses and powerful competitors like Danone and Mead Johnson.
In fact as baby formula is a simple commodity just about anyone can sell it with the right supply agreements and even vitamin makers like Blackmores Limited (ASX: BKL) decided to try and ride the bubble.
Blackmores first announced its intention (and partnership with Bega Cheese Ltd (ASX: BGA)) to move into the baby formula business at the end of 2015 just as the boom reached its heights in what with hindsight may prove to be a spectacularly bad piece of timing.
Less than a year later, Bega Cheese effectively conceded at its October 2016 AGM that the (baby formula) venture had been a flop due to "a supply response to the demand signals and the evolution of supply channels to market (that) now sees significant discounting in the market place and signs of short term oversupply".
In hindsight this admission from Bega's boss over the state of the baby formula market should have resulted in my selling of my own shareholding in Bellamy's with share prices above $12.50. Although with it representing around 1.3% of my investment portfolio, I was mistakenly content to let it ride.
What of Blackmores?
Blackmores shareholders then, including myself, need to consider whether now may be an opportune time to sell its shares considering it is likely to have some bad news up its sleeve regarding its own baby formula business.
Although it may prove foolish, I won't be selling my Blackmores shares unless they soar above my estimate of fair value prior to the release of its half-year report in February.
As I have written before, I expect Blackmores will outperform the baby formula and other China-exposed consumer businesses over the long term.
While it's apparent that baby formula is only a tiny part of Blackmores' business, there are a couple of other important differences when considering the investment cases for these companies.
Blackmores has been a market leader for more than 80 years with its current chairman in the role since 1975. It also has a multi-decade and successful track record as a public company that should give investors confidence that this company is no flash in the pan.
Much of Bellamy's fall has been attributed to mismanagement of its Asian markets in particular, which should not surprise much given it had only just started operating in these complex markets.
Blackmores however has been successfully selling vitamins into Singapore and Malaysia since 1976, with Thailand operating since 1989. It is early days for it in China having only operated there since 2013, but given its track record investors can expect its entry there to be managed more successfully than others.
More important is the fact that vitamin retailing would appear to have higher barriers to entry than baby formula in terms of production complexity and brand appeal. Blackmores' long track record underscores this point.
I must admit though that I think its shares look on the expensive side at $112 and investors today must be expecting a return to growth in FY18 after what will be an almost certain fall in earnings over the course of FY17. Still, if you consider that it could return to FY16's earnings in FY18 it trades on around 19x an estimate of FY18's earnings.
For a business that could deliver strong compound growth over the very long term thanks to its dominant competitive position in Australia and serious growth potential across Asia this is probably ok value, however, I expect investors will be offered a cheaper entry point by a short-term focused market over the course of 2017. Investors should watch to see if Blackmores does confess to its baby formula problems as if the share price craters it could be time to buy.
