Looking back on Bellamy’s
We last commented on Bellamy’s Australia (ASX: BAL) back in September (see here) when the shares were trading at $6-$7. We thought it was expensive back then and with the share price hitting the lofty heights of $12 we can only stand back aghast at the multiples being paid (a 132x multiple of FY15 earnings and almost a 54x multiple of FY16 earnings).
Nonetheless, our analysis still stands and the thesis is beginning to play out. As we noted, “Microeconomics 101 will tell you that as new entrants begin to take market share in a relatively commoditised product (which it can be argued, baby formula is), you would expect profitability for incumbents will tend to fall and that over the long-run profits will return to approximately each competitor’s cost of capital. Because of this, one does wonder how long Bellamy’s shares, and others, can continue to defy gravity.”
Blackmores Limited (ASX: BSL) appears to be one of those new entrants and given the large profit margins baby formula is generating, we can only anticipate more to come (further details on Blackmores entry can be found in this article by SMH here).
It’s of course disappointing as investors to witness such a rise and not be one of the beneficiaries. We might add that ‘staying the course’ in investment management often involves ignoring the fads in favour of more stable longer term trends.
Scott Shuttleworth is an analyst at Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Steve Jones
:
An updated post may be useful as based on Bellamy’s current earnings the current prices do not seem as exorbitant 12 months in.
Brian
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High margins by incumbents will encourage competition no doubt, but what does your research indicate is the ‘size of their moat’. After all, actually successfully executing a meaningful entry or expansion in such a niche and essential food product would be shall we say ‘challenging’!?
Scott Shuttleworth
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Hi Brian
In terms of your comment:”After all, actually successfully executing a meaningful entry or expansion in such a niche and essential food product would be shall we say ‘challenging’!?”
Is it? Suisse a few years ago managed (albeit with considerable expense) to create many problems for Blackmores Limited (ASX: BKL). Ironically, Blackmores will now be challenging Bellamy’s.
I’d say there’s several large multinational corporations in that industry who could fund and execute such a strategy.
Sam Goh
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One has to wonder Why other Western countries are not coming to this party too. Surely the China demand can’t be outstripping the supply right??
Interesting……
Scott Shuttleworth
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Hi Sam
It can take some time but generally in business, competition will increase in any area where there are economic profits in existence. Investing opportunities can potentially arise when this rule of thumb is violated – which is what we spend a lot of time researching here at Montgomery.
Just takes some time..
Gav J
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Have you considered shorting BAL, or too risky at present?
Scott Shuttleworth
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Hi Gav
On the domestic side we don’t currently have the ability to short. Shorting is far out of my field of expertise but what I could probably say is that we have a fairly strong fundamental case for why the firm is overvalued – but not necessarily a case for why it couldn’t become more so before we’re shown right.
And this is even before we consider the downside if our thesis is wrong…
Adam
:
Hi Scott
Firstly I would like to declare I am a Bellamys shareholder and I replied to your last posting about BAL at the $8 mark.
I do shake my head in amazement at the continued climb in the share price and PE of this stock. I decided to do a bit of ground work and hunt down one of the grey market packaging warehouses to find out why they loved this product. Three reasons after speaking to several people there. 1) the on sale at a higher price to China, so good money to be made. 2) the Chinese don’t trust their own product and Bellamys seen as best product in Australia for babies. 3)Aussie mums love Bellamys so that’s good enough for the Chinese.
While this continues BAL will,I believe ,continue to grow NPAT And EPS. The new manufacturing arrangement with Fonterra will significantly increase supply and with NO debt and $30 million in the bank ,only good news coming out of BAL at present.
I am looking forward to profit season when BAL will produce a stellar result.
I hold for now but looking to take some profits along the way.
Scott Shuttleworth
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Hi Adam
Great fundamental research, just be sure to consider the sustainability of those advantages in the face of more competition.
We hope your investment does well this reporting season!
Bryant Bice
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I am very happy for you guys and gals not to follow fads which is one of the many reasons why I keep putting more of my money with your funds as time goes by. Keep up the great work and I hope you all manage to have a very well deserved break over Christmas and New Year
Scott Shuttleworth
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Hi Bryant
Thanks for the words of encouragement.
All the best
Paul
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Thanks for the article. Yes it has been a bit disappointing to watch on as this stock has grown enormously, so this article is reassuring. I wonder how long these prices will last
Scott Shuttleworth
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Hi Paul
Yes it’s a bit disappointing, however we’ve managed to create a portfolio of outstanding firms here at Montgomery and it’s performance has been great.
Keeps our attention elsewhere!