Blackmores and Campbell Brothers: Why I like them

Two companies that I have admired for a long time are Blackmores (BKL) and Campbell Brothers (CPB). Both companies have been listed on the ASX for many years and have excellent track records.

Blackmores is a manufacturer of high quality dietary supplements and Campbell Brothers derives most of its profits from the provision of consulting and analytical laboratory services.

Let’s look at some financial statistics:

Statistic	Blackmores	Campbell Brothers
Average 10 year Return on Equity	31.7%	13.5%
Average 10 year Price-Earnings Ratio	16.8	15.1
Current Price-Earnings ratio*	11.7	10.0
Price-earnings ratio based on forecast 08-09 earnings	11.7	7.8
Average compound growth in earnings**	16.6%	17.2%
Debt-to-equity ratio (as at last reporting date)	75%	73%
Current dividend yield*	6.5%	6.02%
Current dividend payout ratio (07-08 year)	69%	76%
Current share price*	$13.85	$18.27
Approximate market capitalization*	$224m	$961m

* As at 9 January 2009.

** 30 June 1999 to 30 June 2008.

A number of interesting things are apparent from the above table:

1. Both companies have exceptional growth rates over the nine year period;

2. Both companies have maintained exceptional growth rates while also maintaining a high dividend payout ratio;

3. The current dividend yields are attractive compared to bank interest rates (note that CPB’s dividend is 50% franked);

4. The current price-earnings ratios are well below historical averages;

5. Debt is a bit on the high side for both companies (but appears manageable);

6. Blackmores has maintained an outstanding return on equity over the 10 year period (although that is likely to be because its equity is understated, i.e. it has not valued brand names etc that clearly have significant value).

Campbell Brothers has forecast huge earnings growth of 70% for 2008-09 (when so many other companies are forecasting earnings declines). Blackmores’ earnings are likely to be flat for 2008-09.

Neither of these companies were included in The Stock Scribe portfolio because they would not have passed one or two of the filters specified by Benjamin Graham. But this is ok. Investors do need to use a degree of judgment in what they do. I’m willing to be somewhat flexible with companies that have very long and successful track records.

While it would be imprudent to expect that the growth rates achieved for both companies over the last decade or so will be repeated over the next decade, it would be reasonable to assume that some level of growth will take place. The multiples that these companies are currently selling at imply that there will be little or no growth and this seems unlikely based on each company’s past record.

Whenever you are contemplating an investment always ask yourself: “What can go wrong?”

One thing that you should be aware of with companies that manufacture food products or drugs is that they always carry a special risk – the possibility that if there is a scare associated with a “bad” batch of a particular product it has the potential to destroy the business. I would definitely not expect that any such thing would happen with Blackmores, but it is something the investor needs to be cognisant of.

Something else to note is that Campbell Brothers has significant intangible assets on its balance sheet. If we were to calculate the debt-to-equity ratio using only tangible assets it would be 220% - very high. Given Campbell Brothers very long history and reputation, it is likely that those intangibles are valued appropriately (although we can’t say that for sure).

Both companies trade low volumes of shares - something which investors need to be mindful of.

So what are these two companies worth?

I will say that in my opinion (and it’s my opinion only), Blackmores is worth approximately $18 and Campbell Brothers is worth approximately $23. That makes for an interesting situation at prices prevailing in early January 2009.

Note: None of the above constitutes financial advice. You need to do your own research and consult appropriately qualified people for advice (where necessary).