Bellamy’s Australia Ltd surges on takeover rumours

The share price of Bellamy’s Australia Ltd (ASX: BAL) is certainly finishing the week with a bang despite the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) being largely flat. It has jumped 6% today despite there being no news out of the growing organic baby food producer.

However, overnight in the United States there was an acquisition of note that could have had some impact on its performance today. According to the Financial Times, French food group Danone has reached a deal to acquire organic food maker WhiteWave for US$10 billion. This deal values WhiteWave at 41x estimated full year earnings.

Whilst I wouldn’t personally expect a takeover approach for Bellamy’s anytime soon, I feel that some investors may see the deal as justification for paying a premium for its shares. In its half-year results, Bellamy’s delivered diluted earnings per share of 13.9 cents.

Considering the strong performance of its peer a2 Milk Company Ltd (Australia) (ASX: A2M) I feel confident that the second half of its year will be strong. If we annualise its half year earnings we would have full year earnings per share of 27.8 cents, which is equal to just under 40x earnings at the current share price.

Whilst 40x estimated full year earnings may seem expensive, when you consider that the company grew its half year net profit after tax by 325% in December I feel it’s actually quite reasonable. Especially considering the growth prospects it has thanks to the China market.

There were fears that Chinese regulatory changes were going to hinder Bellamy’s, a2 Milk, and Blackmores Limited (ASX: BKL), but these fears were partly quashed by the management teams of each of these companies.

Bellamy released an update on the matter stating that:

“Bellamy’s has been successfully operating in China for over six years. Bellamy’s has a strong “bricks and mortar” business in China selling the company’s GB compliant formula. In addition, our products sold in China via “bricks and mortar” businesses already have labelling in Chinese. We have grown strongly in China also due to the success of our ecommerce strategy. Bellamy’s online flagship store on Tmall is one of the top 15 brands for infant formula, and the guidance provided last night by the Ministry of Finance in China reconfirms that it’s business as usual for Bellamy’s in the ecommerce channel.”

So should you invest in this growth machine?

For me the answer is a yes.

As far as I am concerned this is a company with a lot of growth left in it thanks to the insatiable demand for its products from Chinese consumers. An investment at 40x annualised earnings is great value in my opinion given the rocketing growth.

Finally, if you need to make room for Bellamy's in your portfolio then I would highly recommend you consider removing one of these three rotten ASX shares. In my opinion each of them could be doing more harm than good for your portfolio so it might be best parting ways.

3 Rotten Shares to Sell, and 1 to Buy Today

After a double-digit rally for the ASX since 2016 lows, investors should be on high alert. You'll find a full rundown below of 3 shares we think you should avoid today plus one top pick worth buying, even if the market turns south and the RBA keeps rates at an "emergency low." Simply click here to uncover these stocks.

Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.