The Blackmores Limited (ASX: BKL) share price has risen 4% to $93 at the time of writing since reporting a soft third quarter result on April 16. The rallying share price can be attributed to insider buying and reports by some analysts that Blackmores may attempt to enter into a joint venture with a Chinese partner in order to accelerate sales in that market and negotiate regulatory obstacles.
Weak Q3
For the quarter ended 31 March 2019, Blackmores announced a 4% drop in revenue to $141 million with profit declining 43% to $10 million. The cumulative numbers for the first nine months of FY19 saw profit fall 14% to $44 million despite revenue climbing 6% to $460 million. Looking forward, Blackmores expects modest revenue growth for the full-year and its second half profit performance to not be ahead of its first-half result.
The share price of Blackmores is strongly correlated to its performance in China. A slowdown in top-line growth has been the catalyst in the share price falling 21% over the last 12 months and Blackmores underperforming other ASX listed companies with significant China exposure such as A2 Milk Company Ltd (ASX: A2M) and Treasury Wine Estates Ltd (ASX: TWE).
Blackmores has estimated that overall sales to Chinese customers were down 6% in the March quarter versus the prior corresponding period. The company's estimate takes into account direct sales in China and China-influenced sales through Australian retailers where shoppers buy Blackmores products in Australia before selling them in China at a mark-up. Whilst the potential for significant earnings growth in China remains, the execution in fulfilling that potential has been mixed thus far.
Foolish takeaway
Consensus estimates for FY19 and FY20 earnings per share have fallen by 30% and 35% respectively over the last 12 months which reflects the slowdown in growth and a material adjustment in the market's future expectations. Blackmores is also continuing its search for a new CEO and has announced that it is targeting $60 million in savings over the next 3 years via a business improvement program.
At current prices, Blackmores is trading for around 26 times the consensus estimate for FY19 earnings of $3.52, a significant premium to the broader market's valuation multiple and the company's own recent financial performance. Whilst there is a potentially compelling long-term investment thesis for Blackmores, the market is already pricing a lot of that in. Therefore I think it might be prudent for investors to wait for a cheaper valuation or a material improvement regarding the execution in China before buying shares in Blackmores.
