Why I'm avoiding Bellamy's Australia Ltd shares

Shares in Bellamy's Australia Ltd (ASX:BAL) rebounded on Monday. Should you buy?

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares in former market darling Bellamy's Australia Ltd (ASX: BAL) rebounded modestly on Monday to close 3.74% higher at $4.16 per share. Although Monday's price gains placed Bellamy's amongst the top gainers on the S&P/ASX 200 Index (ASX: XJO) for the day, the rally is little solace for investors in the context of the company's whopping 66% fall over the last three months.

Accordingly, with no certainty that the company's share price has bottomed yet, I believe investors should avoid buying Bellamy's shares. Here's why.

Regulatory issues

Bellamy's experienced a torrid end to 2016, slumping almost 45% in December alone after management announced a shock profit downgrade as new rules by Chinese authorities disrupted supply in Bellamy's key growth market.

In sumamry, Chinese agencies imposed new restrictions on the importation of baby formula into China, causing competitors who were unlikely to comply with the new rules to liquidate inventory. Inadvertently, the fire sales led to deep discounting by competitors, affecting Bellamy's profit margins and revenue.

Operational issues

To make matters worse, shortly after the shock downgrade, Bellamy's entered into a month long trading halt to renegotiate key contracts with New Zealand-based supplier Fonterra Unit NZX (ASX: FSF).

From its review, management forecasts 2017 full-year revenues will be between $220 million and $240 million. Profit margins are expected to slow to between 6% and 9% of revenue in the first half, further reducing to 4% to 6% in the second half.

These estimates indicate no short-term respite is in sight, with the company anticipating a 44% to 66% drop in net profit.

Management issues

Bellamy's completed its trifecta of tumult after announcing a major reshuffle to its executive team.

Managing Director and CEO Laura McBain will depart the company effective 31 March 2017, with Chief Operations and Strategy Officer Andrew Cohen taking the helm as acting CEO thereafter.

Now what?

Though the change in leadership demonstrates the Board's intent to put Bellamy's business back on track, the pivotal regulatory issues in China remain.

Whilst Bellamy's currently remains solvent and compliant with it lending covenants, as investors in Slater & Gordon Limited (ASX: SGH) and Surfstich Group Ltd (ASX: SRF) can attest, things can continue to get worse before they get better.

Accordingly, with plenty of downside still left for the shares, I'd be weary of committing fresh funds to Bellamy's today.

Foolish takeaway

Although I don't expect Bellamy's to go the way of failed Forge Group and Dick Smith Holdings given the company continues to churn out profits, I don't expect a quick recovery to its share price.

Whilst it is entirely possible that Bellamy's China headaches will subside and only affect its 2017 results, I'd wait to see signs of a turnaround before committing to buying the stock.

Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »