The Blackmores Limited (ASX: BKL) share price rallied more than 20% last week after news emerged that the Chinese government had delayed the enforcement of new importation laws that were aimed at curbing the 'grey market' trade of items such as vitamins, health foods and baby formula.
As highlighted by the chart below, the announcement of these new restrictions in April 2016 resulted in the shares losing more than half of their value as personal shoppers for Chinese consumers stopped sending vitamins back home.
Clearly then, last week's announcement is positive news for Blackmores as it is hoped that these personal shoppers will once again resume their role in clearing out the shelves of supermarkets and pharmacies across Australia.
However, I believe it is important for investors not to get too far ahead of themselves as the previous 12 months has highlighted just how vulnerable companies like Blackmores can be to regulatory changes. In fact, there is no guarantee that the Chinese government won't back-flip on their decision again and this is likely to result in shareholders taking another big hit.
So is Blackmores a buy right now?
Blackmores' first-half result was very disappointing with comparable sales down 6% and net profit down 42% to just $28 million. On a more positive note, however, second quarter sales did show signs of improvement and it is likely this positive momentum will continue into the third and fourth quarters of FY17.
Nonetheless, management has guided for a full-year result that will sit somewhere between the record $100 million profit of FY16 and the $46.6 million delivered in FY15.
According to CommSec, analysts are forecasting FY17 profits to be around $70 million or around $4.08 in earnings per share. This means the shares are currently trading on a forward price-to-earnings ratio of around 29. Even with the potentially positive impact from the changes revealed last week, the shares still appear to be fully valued in my opinion for two main reasons.
Firstly, investors should demand a larger margin of safety than ever before as the risk of future regulatory change is much higher and is now clearly identifiable.
Secondly, the 'grey market' trade is unlikely to be as lucrative as it was before as many of the personal shoppers will be more cautious as a result of the events of the past 12 months.
In light of this, I don't think investors should be rushing out to buy Blackmores shares based on the current valuation.
Instead, I would be waiting for the euphoria of the last week to wear off or for evidence that shows the company is on a path to more sustainable sales growth.
