Why Blackmores is worth holding in 2016

Is the 'new' Blackmores here to stay, or will the company's 15 minutes of fame soon be up?

Joe Magyer

Updated Jan 12, 2016 – 2.03pm, first published at 12.00pm

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The hottest stock in the ASX 200 isn't a flash IPO or disruptive fintech. It's been public for 30 years, has a flabby cost structure and only grew sales 6 per cent in 2014.

But Blackmores, the iconic Australian vitamins and supplements pusher, has found a natural remedy for decreased sex appeal: China. The company's shares have rocketed 517 per cent over the past year thanks to surging Chinese demand.

You can be forgiven for missing Blackmores' epic run. Chairman Marcus Blackmore himself sold 150,000 shares in March 2015, in part to fund the purchase of a new yacht. (Don't worry that Mr Blackmore is choking down Executive Stress Formula pills, though: he still owns almost 25 per cent of the company.)

Blackmores ain't cheap, but it's not crazily priced either. John Woudstra

To say the company's newfound fortunes are a surprise is an understatement, like saying Alice Springs is rural or cricket players are thirsty.

What's less obvious is what comes next for Blackmores and its shares. Is the "new" Blackmores here to stay or will the company's 15 minutes of fame soon be up?

Let's backtrack. It's 2014. Blackmores has a strong, trusted brand and consistent demand from loyal customers. The excitement ends there, though.

The annual report reads like a carbon copy of the average on the ASX. China was mentioned 13 times. Sustainability? 14 times. Even the full-year sales growth was ordinary at 6 per cent.

But had someone looked closer – and I wish that someone had been me – they would have noted a strong second half and stronger fourth quarter.

That person might have been less surprised than the market when the company surprised with 17 per cent sales growth in the first quarter of 2015, then 22 per cent for the half, 28 per cent through the third quarter and 36 per cent for the full year. Then the company reported a 65 per cent gain during the first quarter of this fiscal year.

Blackmores CEO Christine Holgate. Louie Douvis

Little wonder the shares have been on an almost constant march higher over the past year. The only thing that gets Mr Market salivating more than an expectations beat is an acceleration in growth, and Blackmores is stomping the gas pedal.

Right product at the right time

Soaring demand in China for food and nutritional products from cleaner and greener countries – Australia among them – coincided with the right product, right marketing and right strategy.

Blackmores' direct sales to China were up tenfold in the first quarter and the company estimates sales to Chinese consumers made up 34 per cent of total sales.

Blackmores isn't the only big beneficiary of the China boom, of course. Bellamy's, the infant food and formula star, posted accelerating growth throughout 2015 on Chinese demand, as well, and the shares have roared 769 per cent higher over the past year.

Happily, we've owned shares of Bellamy's since last March – we're very patient with our winners – though we sold a third of our position recently when the shares shot past $13.

Sensing an opportunity, Blackmores itself is entering the infant formula market itself through a joint venture with Bellamy's supplier, Bega Cheese's Tatura Milk. It's a smart, low-risk way to leverage the Blackmores brand and potentially capitalise on yet another booming market.

Let's review the investment case. There are lots of positives: a strong brand; high insider ownership; accelerating growth; and a call option on infant formula.

The company has also paid off most of the debt it took on in 2012 to fund the BioCeuticals acquisition. That deal is now looking very savvy, and a cleaner balance sheet could free the company to boost its payout ratio (Mr Blackmore might need some furniture for that new yacht).

But what about the valuation? Blackmores isn't conventionally cheap at 62 times earnings, especially if you anchor to the five-year average of 22.

Then again, pre-tax profit rose 151 per cent year over year in the first quarter and the shares sell for "only" 42 times run-rated first-quarter net profits.

Blackmores ain't cheap, but it's not crazily priced either for such a solid core business with accelerating growth. New buyers can probably afford to be patient – corrections are common for high-growth stocks with big price tags – but long-term holders with strong stomachs might want to let this winner run. I would.

Joe Magyer is The Motley Fool's director of research. The Motley Fool owns shares of Bellamy's. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.