The Blackmores Limited (ASX: BKL) share price fell nearly 10% last week amid concerns related to the Australia-China trade war.
However, taking a look at the long-term share price chart, this downwards trend has been happening for quite some time now. Are Blackmores shares good value at current levels?
BKL share price chart
Blackmores is an Australian health supplement company founded in 1930 with operations in Australia, New Zealand, China, Thailand, Malaysia and Singapore.
Recent Blackmores share price movements
The Blackmores share price has pulled back recently as a result of the ongoing trade war between Chinese authorities and Australian exporters. The latest commodities to fall victim have been coal, wine and seafood.
While Blackmores’ supplements haven’t been hit with any tariffs at the moment, investors are no doubt considering what could potentially happen given the situation with other commodities recently.
The company’s Chinese segment accounted for roughly 18% of total revenue in FY20. This amount is by no means the majority, yet still large enough to become a problem if trade restrictions were to arise.
Blackmores shares seem relatively cheap, are they a buy?
Aside from its China exposure, I also think it’s important to take a step back and look at some of the fundamentals at play here.
I note that over the last five years, the company’s revenue growth has been sluggish with declines in some years. What’s more concerning to me is its net profit figures, which show a gradual decline from about 2018 onwards. Sure enough, from this time onwards, the Blackmores share price has gradually started to fall in line with profit.
To get to the bottom of this, I had a read through the management commentary in the FY19 annual report.
Management said that the decline in net profit was the result of operating costs growing at a faster rate than expected, which cut into margins. The business is currently under a three-year program to streamline its operations and hopefully realise $60 million in costs savings over this period.
Keep in mind this was mid-way through 2019 and now COVID-19 has presented an additional challenge with a drop in sales across most of its segments.
Vitamins and health supplements is a highly competitive market that requires lots of product innovation in order to stay ahead. I also note a comment out of Blackmores’ FY20 annual report that says products will be priced higher to offset the cost increases in raw materials.
I’m not sure how this will work out, given that retailers usually often compete for price in order to differentiate themselves.
Blackmores is more likely to run a product differentiation strategy rather than being a cost leader, so it’ll ultimately come down to whether customers are willing to pay more of a premium for a quality product.
Summary
I’d personally want to see how the cost reduction plan goes and its effect on margins before I’d add Blackmores shares to my own portfolio.
For some more share ideas, click here to read: 3 ASX growth shares to add to your 2021 watchlist.
