The share price of health supplements company Blackmores Limited (ASX:BKL) is down around 18% to $130.28 since the release of its half yearly earnings report for the period ending 31 December 2017. Is it time for investors to buy the dip?
What happened?
The stock has been sold off following its earnings release after the company delivered a result that fell short of market expectations. Group net sales rose by 9% to $287 million with group net profit after tax growing by 20% to $34 million over the prior corresponding period (pcp). Net profit for the first half of FY18 is still lower than the $48 million the company earned in FY16.
Revenue for Blackmores Australia and New Zealand was down 2% compared to the pcp to $121 million. Part of the decline is related to sales being made through direct avenues in China which saw sales rise by 27% to $74 million. Sales in other Asian markets also grew by 18% to $39 million. The China growth thesis is still in play, although Blackmores is not executing as effectively as other Australian companies such as A2 Milk Company Ltd (Australia) (ASX:A2M)
Earnings before interest and tax (EBIT) for Blackmores Australia and New Zealand rose by 19% to approximately $26 million which was the main catalyst for overall group earnings growth. The company's operations in China were not as profitable and only managed to increase EBIT by 4% to around $21 million due to large investments in resources and operating expenses aimed at expanding the company's presence in China. A doubtful debts provision of almost $3 million also lowered profitability.
Supply challenges affected the company during the period impacting the BioCeuticals, Global Therapeutics and Asia segments of the business. Management expects the supply issues and the soft Australian retail market to impact the company in the second half, although they remain confident the company will continue to grow earnings. No earnings guidance figure was provided in their outlook.
Foolish takeaway
Blackmores is a quality business that is well positioned to take advantage of the growth in health supplements. The bullish thesis tied to the increasing economic prosperity and expanding middle class in China and other Asian countries remains intact. The real dilemma surrounds the valuation which explains the sharp sell-off post earnings. The company delivered a solid operational result but did not meet the expectations the market had priced into the stock.
At current prices, the stock is trading at around 32 times FY18 earnings with a dividend yield of 2.23%. The post earnings drop has made Blackmores more attractive for an entry. However, in my view, the current valuation combined with the soft outlook for the second half makes the stock look close to fully priced in the near term.
