Despite an enthusiastic start to 2019, the Bellamy's Australia Ltd (ASX: BAL) share price has retraced since the beginning of April and could be heading to the buy zone again. Despite relatively weak earnings, investors seem optimistic about the company's future as Bellamy's looks to rebrand and further invest in the booming Chinese consumer market.
Investors positive after earnings
Earlier this year infant formula and organic food company Bellamy's reported earnings which were favourably interpreted by investors. Bellamy's reported net profit after tax (NPAT) for the half year of $16.5 million, down from an NPAT of $22.4 million the year prior and below market expectations. In addition, the company reduced guidance for revenue in 2019 to $275 million after initially forecasting in the $330 million range.
Bellamy's cited its lower revenue and guidance to delays in its SAMR (State Administration for Market Regulation) accreditation to import into China. Despite a fall in revenue, investors seemed positive in Bellamy's future with the share price rallying in early 2019.
Rebranding and formula with Omega 3
Much of the weakness in earnings have been attributed to an inferior product from Bellamy's which does not include ingredients that are deemed essential to Chinese consumers. In a bid to rebuild the business, Bellamy's plans to upgrade and rebrand its infant formula by including Omega-3 and GOS probiotics in the formulation.
The inclusion of Omega-3, which reportedly supports brain development, has the potential to be a winner among Chinese consumers which could help Bellamy's boost sales and earnings. In addition to rebranding, Bellamy's also plans to further invest in the Chinese market by doubling marketing spending and increasing the size of its China team.
Overstretched fundamentals
Based on its price-to-earnings (PE) ratio of 36.9, Bellamy's looks a little overvalued in comparison to the sector average of 20.4. Given the PE ratio and 29% expected year-on-year earnings growth, Bellamy's has a PEG ratio of 1.27, which also indicates that the share price is currently overvalued.
Recently Citi released a note downgrading Bellamy's rating from buy to neutral with a revised price target of $10.50. Analysts cited that the Bellamy's share price looks fully valued and issued a downgrade on the back of valuation.
Foolish takeaway
Following the initial rally earlier this year, the Bellamy's share price has retraced and could present a buying opportunity. But in my opinion, despite the potential of rebranding and heavy investment in marketing the Bellamy's share price seems fundamentally overvalued. A safer option would be to wait until Bellamy's is finally granted SAMR accreditation before buying shares in the company.
