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  1. #1
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    Default Blackmores - BKL - Halebop analysis

    hey halebop

    im wondering can u do ur wiz sums etc and figure out a Discounted cost price for this company

    im been pondering about it for some time now

    pe is at 23 , slightly be4 industrial average etc.

    Your views and research is much appreciated.

    I have yet to grasp evaluating shares outside of mining

    kind regards,
    dazza
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  2. #2
    Senior Member Halebop's Avatar
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    Hi Dazza. just for you...


    Key Business Tenets:

    Is the business simple and understandable? “Yes”. They purchase commodity inputs for the manufacture and distribution of supplements and health foods.

    Does the business have a consistent operating history? “Yes”. Profitable for decades (I think they listed around 86 or 87? Can remember they generated an element of speculative interest whenever it was). An uneven growth record in the 90’s has been better by a long way in the last 5 years.

    Favourable long term prospects? “Yes”. Aging population, inadequate diets, intensive farming techniques, endemic levels of heart disease and cancer augers for continued demand for “natural” protection.

    Management Tenets:

    Is Management Rational? Loved reading their notices. They never say anything! A sense that they are a no nonsense operator of their business. Distinct lack of flashy acquisitions. While they have had their share of unsuccessful products over the years, this is a typical business risk with any innovator. Organic growth seems the preferred route.

    A “Yes” on this one.

    Is Management Candid with shareholders? Not much obvious need to be otherwise in recent history. The market did get a bit frustrated with them in the 90’s but I can’t really remember the specifics of why performance was choppy nor did I have an opinion on Blackmores at the time.

    Their lower than expected profit in 2002 seemed a bit slow in being announced but it was a rough year if I remember rightly (Pan I think had their problems?)

    Marginal “Yes”

    Does management resist the institutional imperative? Yes. High dividends. Low capex. Few acquisitions. Like it!

    Financial Tenets

    Return on Equity Rising from the teens in the 90’s, through to the 20’s and in solid 30’s during the 2000’s.

    Owner Earnings I only looked at 5 years which is a fraught sample (6 to 7 is better) but the results were good. Capex has historically been low, meaning most cash earnings can be spent as desired (in this case mostly dividends).

    In the last 5 years owner earnings went from $4.6m to $7.0m to $9.9m to $10.8m to $11.8m. Dividends were high but retained owner earnings also remained positive for each of the last 5 years. Management know how to spend less than they earn. Given low capex numbers, much of these earnings must have been maintained as working capital (current ratios support this). Retained owner earnings were around $10.25m for the 5 years.

    As an aside, the working capital increase vs low capex tells me Blackmores can and have been expanding incrementally and organically. Nice to know they can almost double their sales in 6 years on only $11m or so in capex.

    Profit Margins

    EBIT to Sales margin
    2000 11.2%*
    2001 12.2%*
    2002 10.2%
    2003 10.4%
    2004 11.9%
    2005 12.6%
    2006 14.0%

    * Blackmores calculation rather than mine

    Nice increase, I suspect not much gross margin expansion in there, mostly driven by higher sales on top of little need for extra infrastructure. Given the market has a lot of competition in there, obviously a good performance.

    Valuation

    It would be easy to try and extrapolate 20%+ growth based on recent performance. While they could do it, embedding that sort of growth in a valuation model is asking for trouble. My one cautionary note is that I prefer my growth companies to have less growth than 20%, not more. When the wheels come off it can get nasty. …and with high growth the wheels invariably come off at some stage. On a PE of 24, Blackmores is already priced for growth. So anyhoo, assuming a 10% discount rate and…

    20% Growth for 5 years, falling to 3% $25.18
    15% Growth for 5 years, falling to 3% $20.73
    15% Growth for 10 years, falling to 3% $30.81
    10% Growth for 10 years, falling to 3% $21.25
    10% Growth for 5 years, falling to 3% $16.95
    5% Growth for 10 Years, falling to 3% $14.67

    vs current share price of $20.60

    While BKL reach the qualitative cri

  3. #3
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    Default

    I also looked at this and thought "what a great little company". Has the financial capability to achieve high ongoing rates of growth. But my model said I'd need to buy it at under $15. If I held it already, I'd rate it a sell if it hit $25 in the next few months.

  4. #4
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    What a beautiful worked example. Well-done and thank you, Halebop.

  5. #5
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    agreed halebop

    thank you very much for your time

    i did a few sums too, and thought that it was a bit expensive.

    wait and see approach i guess

    i do note that other competitors mainly nutralife and kordels has been taken over by private equities who also has the brand healtharies under their arm.


    the avg daily volume traded in BKL is tiny around 1k shares.

    i havent seen top 20 SH as such but will do soon.

    definately one on the radar for me.

    once again many thanks
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  6. #6
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    Love your work HP! [:I]

  7. #7
    Senior Member Halebop's Avatar
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    Thanks folks! [:I]

    To those who believe history can repeat itself BKL has achieved a 15% compound earnings rate over the last 10 years. Therefore the $30.81 valuation could possbily work. Compound the 10% discount rate for 5 years and you potentially have a $40 share price in 5 years time. Add in the fat dividends and it could be a nice little earner yet. Too many "steady as she goes" assumptions (particularly on the market multiple valuation front) in that one for me but still doable.

  8. #8
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    halebop

    i noticed u said growth

    but could u be a bit more specific

    is it year on growth on ROA or EPS growth?
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  9. #9
    Senior Member Halebop's Avatar
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    quote:Originally posted by Dazza

    halebop

    i noticed u said growth

    but could u be a bit more specific

    is it year on growth on ROA or EPS growth?
    I look at ROA, ROE, cashflow and gross margins. Read my first post carefully. The only time per share metrics come into it is when I value the shares using DCF. The important qualitative criteria have nothing to do with EPS.

    EPS can be massaged by swapping shares for a lower priced company. Never mind that the lower priced company doesn't earn it's cost of capital. This was the model adopted by conglomerates in the 60s and investment companies in the 80s. It doesn't work but there are always those who try. The market will let itself be suckered for a year or two but it never lasts. Think too of why you might be buying another company at a fraction of the market multiple? Just maybe you are getting a great deal and just maybe you aren't...

    EPS can also keep rising even as return on equity (and assets) fall. A company that can maintain returns on higher assets and equity is a rare beast but worth much, much more for it. EPS can also be raised by taking on more risk via leverage. While it can be "sexy" to see your company swallowing up competitors to the left and right, the benefits can be shortlived versus the future costs.

    Hagstrom's Buffett book was good at describing this the relative merit of unequal ROA/ROE propositions:

    Two companies in the same business, each worth $20m. Company A has assets of $20m and profits of $2m, Company B has assets of $10m, goodwill of $10m and profits of $2m. Even though they both have similar organic growth prospects, the 2nd company is much more attractive. To grow profits to $4m, A requires capex of $20m, whereas B requires just $10m invested, which means that growth can be bought and paid for quicker. Which means more growth can be bought and paid for too. In the end, this might mean company B is actually worth $25 or $30m because of it's superior economics.

    The trick then is to purchase at less than it's instrinsic value. And here is the only time I might use EPS (though I'm more likely to use an Owner Earnings hybrid EPS figure because I want to know how much profit it generates for me rather than count money that will need reinvesting just to keep the business going).

  10. #10
    Senior Member Halebop's Avatar
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    quote:Originally posted by Halebop

    I look at ROA, ROE, cashflow and gross margins. Read my first post carefully. The only time per share metrics come into it is when I value the shares using DCF. The important qualitative criteria have nothing to do with EPS.
    I should have added: Don't trick yourself into valuing a company before you have done the qualitative analysis. A cheap company isn't enough. There are plenty of examples on the share trader forum of cheap companies that have swallowed their fan boy's capital.

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