The companies are popular ways to play the rising Chinese consumer demand for high-quality food and health products. This theme has arguably been one of the most powerful trends in the market recently.
Blackmores is now part of the S&P/ASX 100 (Index:^AXTO) (ASX: XTO) and one of the top-10 performers in that index over the last 12 months with shares up 72%.
Bellamy’s and a2 Milk are part of the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) and among the best 10 performers over the last 12 months, up 129% and 158% respectively.
This is despite a large pull-back in each stock since the start of the year, with Blackmores and Bellamy’s down around 40% from their highs and a2 Milk down 30%.
Source: Google Finance
Blackmores is now trading near $131 after touching $220 a share in January. As the producer of a wide range of health supplements, it has a more diverse product range than a2 Milk and Bellamy’s, which are solely focused on milk products.
Blackmores has also recently teamed up with Bega Cheese Ltd (ASX: BGA) to target the demand for infant milk formula, however, it may take several years to grow significant sales in this area.
Why the crash?
Trading on very high earnings multiples, the stocks were vulnerable to a change in sentiment. The primary trigger appears to have been concerns around the new regulatory requirements for selling products in China.
It is my view that the companies are likely to be able to navigate the new regulatory requirements and continue to grow sales. A recent upgrade to its full-year earnings guidance from a2 Milk suggests this will be the case, at least in the medium term.
China remains the largest market for infant milk formula in the world. Clearly, there is also strong demand for the health products from Blackmores, with 20% of their sales now from Asia.
Is it time to buy?
The best time to buy shares in a growth company is when they are on a pull-back, assuming the growth story remains intact.
There is a wide range of analyst views for future earnings; however, based on consensus forecasts, Blackmores has a forward P/E ratio of 22.1, compared to 27.2 for Bellamy’s and 39.7 for a2 Milk.
In my view, all three companies have bright futures and offer decent value to long-term investors at current prices. The current Brexit volatility may lead to even better prices.
If I had to pick one
Blackmores would be my pick of the three, with its strong history, diversified range of products and more attractive dividend yield. Consensus estimates are for dividends of $4.41 and $5.54 for 2016 and 2017, implying forward yields of 3.36% and 4.22% on the current price.