Why the Blackmores Limited share price is climbing again

Credit: Blackmores

Compared to last year, 2016 has been a more difficult year for shareholders of vitamins giant Blackmores Limited (ASX: BKL), although the shares do appear to be making something of a recovery in recent sessions.

The shares have risen another $1.40 today, or 0.8%, to $187, extending their string of gains over the last four sessions. They closed at $174.99 on Wednesday last week and have since gained 6.9%, compared to a 0.3% decline for both the benchmark S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), and rival Bellamy’s Australia Ltd (ASX: BAL).

Although there hasn’t been any company-specific news that could have acted as a catalyst behind the rally, it’s possible that investors are now seeing greater value in the shares following a sharp decline from earlier this year. After all, despite the rebound, the shares are still trading 15.3% below their December high of $220.90.

It’s also possible that investors are becoming more comfortable with some of the changes being made in China, which many believed would threaten the demand for Blackmores’ products.

To begin with, there is a fear that China could clamp down on so-called “grey market” sales, which are believed to make up a large portion of Blackmores’ overall sales.

Blackmores achieved $237.6 million of revenue from its Australian division during the December half – representing growth of 73% on the prior corresponding period – but the company noted that this included “the benefit of sales made to Australian customers which we believe are ultimately intended for Asian markets”. These are what those ‘grey market’ sales refer to.

However, the company has also achieved strong growth in direct sales to Asia. It was feared that a new eCommerce tax to be introduced by China later this week would make imported products almost 12% more expensive, although an exemption to that law means that customers buying food and beverage products* in bulk (those buying more than roughly $100 worth at a time) will barely be impacted.

*Note: I have used the assumption that vitamins and Blackmores’ infant formula range will be included in that group of goods.

Blackmores could certainly be impacted by the new laws coming into place in China, but it appears the market may also have overreacted. Of course, Blackmores’ shares still aren’t cheap, but if they can continue to generate such impressive sales and earnings growth, their shares could have further to rise over the coming years. This is certainly a business worth keeping an eye on.

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Motley Fool contributor Ryan Newman owns shares of Bellamy's Australia. 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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