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I think the Bubs (ASX:BUB) share price is a steal

baby, milk, formula, bellamy's, bubs

I think the Bubs share price looks like a buy to me. Indeed, it has dropped so much Bubs could be a steal for investors today.

Looking at the Bubs share price, it has fallen 34% since 9 July 2020. That’s a big decline considering share markets have continued to be robust since July.

An overview of Bubs

Bubs is an infant nutrition business which specialises in infant formula. It was founded in 2006 by Kristy Carr, who is still the CEO of the business. It sells a variety of products including goat milk formula, organic grass-fed cow’s milk infant formula, organic baby food, cereals and toddler snacks.

The business recently launched Vita Bubs, a vitamin and mineral supplement range which are also formulated with goat milk. This is expected to be a high-margin division which will complement Bubs’ existing product range.

A key part of a consumer products business’ growth is where it’s sold. Bubs products are sold in stores like Coles Group Limited (ASX: COL), Woolworths Group Ltd (ASX: WOW), Chemist Warehouse and Baby Bunting Group Limited (ASX: BBN). Its products are exported to China, Vietnam, South East Asia and the Middle East.

What has been happening?

Bubs announced its FY20 result a couple of months ago, which was pretty impressive in my opinion when looking at the raw numbers. But the Bubs share price has been falling since then.

Total revenue grew by 32% to $62 million. Bubs infant formula sales rose by 58% to $30 million – this represented 55% of group revenue. Direct sales to China increased by 32% to $13 million.

What particularly impressed me about the result was that export markets outside of China delivered a fivefold increase – and this represented 10% of total revenue.

Another pleasing element of the result was that the normalised gross profit margin improved from 21% to 24%. Growing margins is the sign of a promising business.

Bubs’ infant formula has a gross profit margin of around 40%. So the more of Bubs’ total sales that are infant formula, the higher the overall Bubs’ margin will be. That’d be good for the Bubs profit and Bubs share price.

Investors didn’t seem to like the announcement by Bubs that it would try to fast track its SAMR (State Administration for Market Regulation) registration with a ‘created by Bubs’ localisation strategy with joint venture partner Beingmate.

The China market is a huge potential market for Bubs’ infant formula. I think it’s better for Bubs to be involved in China rather than miss out on most of that opportunity. Whilst not ideal, I think Bubs has made the right longer-term decision given the choices.

Why I think it’s a steal

The Bubs share price looks like a steal to me because of how far it has fallen and how much long-term potential Bubs has.

I think investors need to look at the long-term potential growth of Bubs. It’s aiming for revenue of $400 million by 2025, with a gross margin floor of 40%.

There may be continued difficulties in the first half of FY21 because of COVID-19 impacts. I’m looking ahead to FY22 and beyond. I think this short-term period could turn out to be the low point for the share price – though of course it could go a bit lower in the coming weeks, no-one can tell what a share price will do.

I’m particularly excited about the growth potential for Bubs’ export markets away from China. There’s more to Asia than just China. The products are already resonating with customers in Vietnam, where it could generate much more growth in the coming years.

At the current Bubs share price, I’d be very happy to buy shares.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of February 15th 2021

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended BUBS AUST FPO. The Motley Fool Australia owns shares of COLESGROUP DEF SET. 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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