What happened? Shares in Blackmores Limited (ASX: BKL) look extremely expensive today after closing trade on Tuesday at $134, just shy of an all-time high of $138, some 305% higher than where they started the year. Could there be any life left in the share price?
First, we need to understand why shares in Blackmores, a well-established natural health company, have surged such an incredible amount in 12 months.
Put simply, everything's gone much better than planned and investors have jumped on board at each company update since this time last year. The recent full-year results revealed the following, when my colleague Tim McArthur covered it in August:
- Sales in Australia increased a staggering 43% to $317.4 million with profits leaping 88% higher. Management stated that the strong domestic growth was achieved via "double digit growth across all sales channels including community pharmacy, and appears to have been boosted by increased demand from Chinese tourists and entrepreneurs."
- Sales into Asia grew 26% to $84 million – sales have doubled in the past five years. The earnings before interest and tax (EBIT) contribution from Asia was up 82% to $8.3 million.
- The recently acquired Bioceuticals business has surpassed management's expectations, achieving an 18% increase in sales to $55.5 million with a corresponding rise in EBIT of 27% to $8.7 million.
This resulted in earnings per share increasing by 81.4% to 270.7 cents per share, above even the most optimistic forecast heading in to the results season and saw the share price rise nearly 25% as a result.
Could there be any life left in the share price?
Blackmores is trading on a rather ludicrous trailing price to earnings ratio of 49.6 and dividend yield of 1.5%, and an estimated forward price to earnings ratio of 37.4 and forward yield of just 1.9%.
Investors are pricing Blackmores as a high-growth exposure to the growing Asian middle class through its range of vitamins and supplements, which are proving popular in the region so far. The company now operates in 14 countries including Australia, New Zealand, Thailand, Malaysia, Hong Kong, Singapore, Taiwan, China, Macau and Cambodia.
Blackmores could trade higher, say at a forward price to earnings ratio of 50, but even Domino's Pizza Enterprises Ltd. (ASX: DMP) with its exceptional track record of growth, trades on a forward PE ratio of 42 and is priced for some serious aquistions over the next 24 months.
Now What? Investing is a tradeoff between risk and reward. I'm of the opinion that Blackmores doesn't yet have the runs on the board to justify a forward PE ratio of 37, which is assuming a tonne of growth in Asia.
For example, is there more or less risk involved in investing in Slater & Gordon Limited (ASX: SGH) at a trailing price to earnings ratio of 7.9 and forward ratio of 4.7 than there is Blackmores? The risks involved in Slater and Gordon's legal issues look priced in, while a disappointment in sales could send Blackmore's price back down to earth.