Blackmores Limited (ASX:BKL) shares closed yesterday at $123.56 going into today’s December half-year result, which was released pre-market today.
The company is priced for growth and growth is what the market expects.
The well-known health supplements company reported revenue up 11% to $319 million and net profit after tax (NPAT) of $34.3 million (vs $34.2 million in the prior December half).
Priced for growth
Blackmores has a relatively clean capital structure with 17.296 million shares, meaning the company has a market cap of $2.137 billion at the close yesterday.
The company’s FY18 NPAT was $70.0 million, meaning the company’s value is 30.5x its FY18 earnings (also known as a PE ratio of 30.5x).
To be fair, it is more common for quoted PE ratios to use the upcoming financial year’s earnings, in this case, FY19.
Leading into today, analysts were estimating FY19 NPAT for Blackmores of around $77 million, lowering the PE ratio to 27.75x.
When you’re priced for growth, you have to deliver
Typically, if you’re a high PE company, it means investors are expecting growth, and 27.75x is considered a high PE company.
So when Blackmores told the market today it had nearly not grown at all in the recent December half compared the prior December half – this caught investors by surprise.
A bloodbath ensued
After closing at $123.56 yesterday, Blackmores shares opened at $88.00, down a massive 28.8% and it did not stop there.
The stock went lower in the first 20 minutes of trading, eventually bottoming out at $80.45, down 34.9%, a spectacular decline by any standards.
After the stock bottomed the company commenced its bounce-back and went as high as $99.02 before settling back in the $95-96 range during mid-session.
Deciding if Blackmores is cheap or expensive now?
Often low PE ratios are associated with companies that are ‘cheap’ and high PE ratios with companies that are ‘expensive’.
Every time the price of a stock moves, it affects the PE ratio given that PE is price per share / earnings per share (or market cap / NPAT).
First of all, a judgement must be made on the upcoming FY19 earnings (NPAT) – given today’s December half was below expectations, it is now likely the FY19 expectations will be lower than $77 million.
Let’s guess FY19 NPAT will now be $72 million – this means the PE was:
• $88.00 open: 21.1x;
• $80.45 low: 19.3x; and
• $99.02 high: 23.8x (stock still may trade higher as session not yet finished).
If Blackmores had delivered or beat expectations, its PE would have been well over 30x but today's mishap means the company has some work to do to win back past valuation metrics.