What is happening to the Bellamy’s Australia Ltd share price?

Bellamy’s Australia Ltd (ASX:BAL) shares have rallied more than 27% since Friday afternoon

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Shares of Bellamy’s Australia Ltd (ASX: BAL) have picked up where they left off on Friday, lifting another 3.9% to $13.30. They traded as much as 6.7% higher at $13.87 shortly after the market opened.

Indeed, Bellamy’s was one of the most successful shares on the ASX throughout 2015, surging as high as $16.50 late in the year. However, they were sold down heavily by investors in January as some investors took their profits while others likely went in search of ‘the next big thing.’ The shares hit a low of $10.23 on Friday.

In light of the sharp fall, however, the company issued a trading update on Friday afternoon telling investors to expect a huge lift in revenues and earnings for the six-month period ended 31 December 2015. The shares have rallied more than 27% in the time since.

Bellamy’s said its unaudited accounts for the period suggested revenue of $105 million, up 80% from the prior corresponding period. Meanwhile, earnings before interest and tax (EBIT) of $19 million is already 58% higher than the $12 million EBIT reported for the entire 2015 financial year.

Better yet, there are a number of encouraging reasons why those figures should continue to grow over the coming years:

  • There is a high level of demand for Bellamy’s products;
  • Its improved ability to meet those demands – thanks largely to its recent manufacturing agreement with FONTERRA ORD UNIT (ASX: FSF) (“Fonterra”);
  • Bellamy’s recently increased the prices of its infant formula products

On top of that, China abolished its controversial one-child policy in 2015, which should see demand remain strong for Bellamy’s products in that key growth market.

Of course, there are risks involved as well. To begin with, Bellamy’s’ products are loved around the world due to them being organic, creating greater certainty that the end consumers are buying a quality product. Any health-scares regarding its products could severely impact its reputation and hinder its growth.

What’s more, the company is also facing some tough competition in the form of the a2 Milk Company Ltd (Australia) (ASX: A2M) and also Blackmores Limited (ASX: BKL). In saying that however, supermarkets have had a tough time keeping their shelves stocked with infant formula from high-quality brands, so there is clearly room for more than one company to prosper.

Bellamy’s shares are by no means cheap but, at least in my opinion, their sheer rate of growth justifies that price. The shares could still make for a great addition to your long-term portfolio, although it is clear the early gains have already been made.

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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.

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