Vitamins company Blackmores Limited (ASX: BKL) has reasserted itself as a market darling following the release of its full year profit result yesterday but Credit Suisse warns that this isn't enough for investors to hang on to their shares.
The warning isn't hurting sentiment towards Blackmores though with its share price racing up a further 1.1% at the time of writing to $164.18 after adding around 10% yesterday when management unveiled record sales of $601 million and a 19% jump in net profit to $70 million.
Blackmores is riding on the coat tails of the Chinese consumer like so many other market darlings have before, including A2 Milk Company Ltd (ASX: A2M) and Bellamy's Australia Ltd (ASX: BAL).
But just as Blackmores is regaining favour with investors following its 14% slump since the start of the calendar year to just before Tuesday's profit results, Credit Suisse downgraded the stock to "underperform" from "neutral".
It's nothing to do with Blackmores' earnings outlook and just that it's run ahead of fair value, according to the broker, although there could be a more sinister reason lurking in the background.
Credit Suisse thinks consensus forecast on the stock is too bullish, and if it is right, it means Blackmores is "cum-downgrade"!
"Management stated JunQ net sales in China grew 26%, up from about 8%- 9% in MarQ. This was driven by up-weighted marketing and promotion—the "women's health" campaign and e-commerce platform trade deals," said Credit Suisse.
"We model 20% China sales growth in FY19. If Blackmores were to achieve 30% sales growth in FY19 and FY20 in China, our EBITDA would align more closely to that of consensus."
That's a high hurdle and Blackmores' margins may not expand as much as many may be hoping.
While there's some operating leverage in the business where an increase in sales should lead to a larger increase to its bottom line from economies of scale, Credit Suisse thinks Blackmores may need to invest significantly more in advertising and marketing to achieve the strong sales growth that the market is pinning its hopes on.
"Health & Happiness (Swisse) reported yesterday a group-wide increase in advertising and marketing of about A$56mn, +93% (across both its divisions) in the June half vs pcp. Total H&H advertising and marketing ran at 12% in the June half," added the broker.
"For BKL, A&M [advertising and marketing] (excl. selling) is perhaps less than 10% of sales. Nevertheless, we model 100 bp of Group EBITDA margin expansion to FY20 from scale, cost reduction program and newly acquired factory that partially internalises supply."
Even in Australia, Blackmores has not been able to keep up with archrival Swisse as it posted sales growth of 20% in the June quarter compared to a relatively flat result for Blackmores.
What's more, Blackmores is trading on a FY20 price-earnings (P/E) multiple of around 30 times based on Credit Suisse's numbers, and that's similar to A2 Milk or Treasury Wine Estates Ltd (ASX: TWE) which have better nearer-term growth prospects.
There's another stock with a brighter outlook than Blackmores as well, according to the experts at the Motley Fool. This stock may have race ahead of the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) in FY18 but it still has room to outperform the market.
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