More compelling entry point into Blackmores needed

The meteoric rise in the fortunes of Blackmore Ltd's (ASX: BLK) share price – up around eightfold in the last two years – should remind all investors that share markets are forward and not backward looking. 

But after the recent run up – which has admittedly pulled back somewhat after hitting $220.90 early January – there's growing concern that following rising expectations for future growth rates, the stock is now looking completely 'baked' at current levels. 

Shareholders lucky enough to have ridden the last two years of rapid price appreciation have little to complain about, even if the price does soften further. The trouble is anyone looking for an entry point into the stock at current levels is going to have to pay through the nose on the pretext that there's even more good news yet to come. 

To get a feel for exactly how expensive Blackmores is, the shares still boast a trailing P/E ratio of over 65x.

Underscoring serial re-ratings received by the company was a litany of good news dished up around its exceptional brand recognition, and aggressive expansion into Asian markets. 

Due to its high demand for Australian health products, Asia now accounts for around 30% of Blackmores' sales. 

What also captured the market's imagination is what a new Australia-China free trade agreement could do to turbocharge exports to that market, plus some embedded economies of scale that comes from manufacturing vitamins in increasingly larger quantities. 

Adding to Blackmore's upside, both locally and within Asian markets is the development of a new lucrative range of infant nutrition formulas with another iconic Australian brand, Bega Cheese Ltd (ASX: BGA). 

As well as hitting the shelves of Australian pharmacies this week, these new formulas will also to be sold through established retailers in Asia including TMall. 

In addition to being a well-managed company, Blackmores has one of the most impressive balance sheets of any stock listed on the ASX. Return on equity (ROE) has averaged 36.09% since 2006, and net-debt to equity has decreased to 5.32%. 

Revenue of $326 million in the 12 months to Sept 2013 jumped 64% to $535 million in revenue in the 12 months to Sept 2015, and this led to a 157% increase in net profit.

Equally impressive, earnings per share (EPS) which have risen at 13% annually over the past five years, is expected to continue growing at an exceptional rate; with EPS of $2.71 in 2015 rising to $5.54 in 2016, $7.03 in 2017, and $7.54 in 2018. 

On top of all that, the stock also pays a fully franked dividend, which this financial year will be around 2.33%. 

But despite all that, the trouble with entering the stock on the expectation that the share price genuinely reflects future cash flows is that it highly exposes you to downside risk. 

Concerns about a Chinese slowdown have already placed downward pressure on the price, and this makes it even more vulnerable to profit-taking. Admittedly, long-term holders in Blackmores are sitting on huge gains, but that's cold comfort for those looking for an entry point and the company's share price is now down more than 21% in a month.

So if you do still like Blackmores' long-term growth story – and there's no reason why you shouldn't – holding out for a more compelling entry point within a down-market makes a lot of sense.