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Down 52% in 6 months: Is the Bellamy’s Australia Ltd (ASX:BAL) share price a buy?

Credit: Bellamy's

A lot of growth shares in the technology and consumer-facing sectors saw huge price falls over October including the likes of WiseTech Global Ltd (ASX: WTC), Treasury Wine Estates Ltd (ASX: TWE) and The A2 Milk Company Ltd (ASX: A2M).

One of the worst performers of all has been Tasmania-based infant formula retailer Bellamy’s Australia Ltd (ASX: BAL). Its shares are down from $16.80 to $8.04 today in just 6 months. So is Bellamy’s share price now a bargain or value trap?

Let’s take a look at a few arguments for and against.

For 

  • Bellamy’s has a very strong brand amongst its target market of parents who are prepared to pay premium prices to get ‘the best’ organic formula and baby food for this children
  • Total revenue is still on a strong upward trajectory, growing from $125 million in FY 2015 to $329 million in FY 2018. Also, adjusted EBITDA or operating income has grown strongly from $14 million in FY 2015 to $71 million in FY 2018
  • In FY 2019 the group is forecasting its Australian label sales will grow up to 10% and its adjusted EBITDA margin should grow marginally to 22%-25%. Rising sales and margins are commonly a ‘buy signal’ for professional investors.

However, Bellamy’s has a few risks as well.

Against

  • Bellamy’s sales growth forecasts for FY 2019 exclude Chinese label sales as the group is still waiting for regulatory approval in China to sell its Chinese label products in the “offline” channel that it says represented 6% of FY 2018 revenue. It has no idea on the potential timing of any approval. While the China market is attractive, it comes with a lot of uncertainty.
  • Bellamy’s has a mixed track record as a listed company with shares falling under $4 in January 2017 after the group was suspended from ASX trade for nearly a month as it frantically renegotiated supply agreements in an attempt to avoid insolvency.
  • Baby formula businesses have low barriers to entry in that it’s not hard to source and supply the powder for sale, with powerful multi-nationals like Danone and Nestle in the space. There’s no patent protection either for example, therefore investors are relying on Bellamy’s brand strength.

Foolish takeaway

Bellamy’s earned 39.2 cents per share in FY 2018, which places it on 21x trailing earnings. This is moderately expensive, but the shares are still trade at a big discount to prices over the past 6 months. If you buy into the China growth story and Bellamy’s success in Australia it could still offer investors strong long-term returns.

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Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. The Motley Fool Australia owns shares of A2 Milk and WiseTech Global. 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 Scott Phillips.

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