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BELLAMY'S A CASE STUDY12.12.2016

The lesson: you can profit from following the herd, but don’t be a slave to it. You have to think for yourself. And luckily, you’ve got Under the Radar Report to help you.

BELLAMY’S AUSTRALIA(BAL)

Organic baby formula
First Tip Price: $2.80
First Tip Date: $12 March 2015

Current Price: $6.49
Date: 8 December 2016

We remember a time when the Tasmania based organic milk formula marketer’s share price of $6.41 sent jitters through the market place because of its exponential growth. And that was just over 12 months ago!

It’s been a big journey for Laura McBain’s Bellamy’s and one which has been very profitable for Under the Radar Report’s subscribers who followed our advice. We first tipped the stock at $2.80 in March 2015, then again a month later at $2.87 and again, another month later at $3.49. We were nervous at $6, but we kept seeing sales exceeding expectations, so we held on.

Then last February, we saw worrying signs (static profit margins) and advised to Take Profits at $12.32; only to jump back onto the Buy tack at $10.90 after selling related to increased Chinese regulations. Finally, we jumped out at last August and advised to Take Profits at $14.96, citing the “magic pudding” scenario being painted by investors in order to justify that price.

The lesson: we believe that you can profit from following the herd, but don’t be a slave to it. You have to think for yourself.

So, what to do now?
Its shares have more than halved after its trading update last Friday, which highlighted materially slower revenue growth than forecast. First half 2017 revenues are now forecast to be up 14% on the same period last year, but down 14% on the second half 2016. Slower sales growth and business investment means weaker profit margins, with EBIT margins down 5 percentage points on the prior half (2H16).

The implication of all these numbers is that demand for its organic milk formula for babies has fallen big time in the company’s previous rainmaker, China. McBain and her CFO did nothing to allay fears that this was a temporary glitch. Of note is that it stands in stark contrast to A2 Milk’s recent experience.

Current expectations are for EPS of 33 cents in FY17, versus its 39 cents in FY16. Analysts are expecting a resumption of growth in FY18, which would get back to FY16 levels. To give you an idea, back in August last year, the market was expecting EPS for FY18 of 85 cents!

The new EPS forecasts still encourage a belief that Bellamy’s will live again. Its now on a current year’s PE of 19 times and on an FY18 PE of 16 times.

RADAR RATING:
If you still hold Bellamy’s, we would not advise selling. The company has a good product, but expectations are being re-based downwards. Who knows, we might step back in again, if we seen an opportunity, but for the time being, it’s management’s reputation has been severely damaged and it will take a while before it can regain that confidence that led to such spectacular growth. HOLD.

About the Author

Caroline Mark

Caroline is the publisher of Under the Radar Report. She has a diverse background, from producing financial publications, to fundraising and marketing.

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