Why the Blackmores Limited share price has crashed

Credit: Blackmores

It has not been a great day for shareholders of Blackmores Limited (ASX: BKL) to say the least. Its shares have come crashing down today wiping out most of last week’s gains.

The decline appears to be related to the news that late last week China’s finance ministry signalled further regulatory tightening on foreign goods purchased over the internet.

Although there is a distinct lack of clarity in the new regulations, importers believe it will result in higher logistics costs. With there being no option but to pass these costs onto the consumer, many expect to see a fall in demand.

It therefore comes as no surprise to see the share price take a tumble. Blackmores’ share price currently trades at just under 40x earnings. Investors are seemingly prepared to pay a premium for the shares because of the potentially explosive growth that lies ahead.

But when this growth becomes threatened, the share price is unfortunately vulnerable to large declines. According to CommSec, analysts have been expecting earnings to grow by 63% per annum through to 2018. If demand from Chinese consumers does fall, it seems very unlikely that the company would be able to produce the level of growth that is expected of it.

It is worth pointing out that the regulatory changes have not been explained in full as of yet. So there is a chance that the company may not be affected. However, judging by the sell-off today it appears the market believes it to be a forgone conclusion.

Perhaps what makes things even worse is the fact that the Chinese government introduced a new 11.9% value-added tax last week. The tax came into force on Friday in China and will be applied to all foreign goods bought over the internet.

Blackmores are not alone in being caught up in these changes. Other companies which rely on the Chinese market such as a2 Milk Company Ltd (Australia) (ASX: A2M), Bellamy’s Australia Ltd (ASX: BAL), and Bega Cheese Ltd (ASX: BGA) will also be affected. It won’t be a surprise to learn that they have also come under heavy selling pressure today.

This sell-off could present investors with a good entry point today. But for me, I would take a step back and wait until the full extent of these regulatory changes are understood. In the mean time these three blue-chip shares could be fantastic buys today. They are definitely worth considering for your portfolio.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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