Investigation of Blackmores Limited Earnings Announcement in the Equity Market - Case Study Example

Name of Students Name of Institution Date of Submission Table of Contents Table of Contents ii 1.0 Introduction 1 2.0 The company’s earnings announcement 2 3.0 Impact of the Earnings’ Announcement 3 4.0 Conclusion 4 APPENDIX: DATA ANALYSIS 5 BIBLIOGRAPHY 9 EFFECTS OF BLACKMORES LIMITED’S EARNINGS ANNOUNCEMENT 1.0 Introduction Blackmores Limited is one of the major companies in Australia dealing with natural health products. The company has been on the forefront of campaigning for the well-being of individuals across the world. The company is practically involved in production and provision of natural health products besides administering consultation services in respect natural healthy lifestyle. The company has an excellent team of health practitioners who provide satisfactory services to individuals across the world. The company has a number of products for treating a variety of complications such as eye problems, digestive malfunction, children’s health issues, brain complications, joint & muscle pains among others. Blackmores Limited has branches in China, Hong Kong, Korea, Malaysia, Kazakhstan, Taiwan, Thailand, New Zealand and Singapore that supplies its health products and it is still in the verge of growth due to increasing demand for their health products as a result of :- The high number of people with obesity, heart related diseases and high blood pressure who want to control further complications The increasing creation of health awareness campaigns throughout the world. The individuals’ sudden over reliance on fast foods which to some extend hinder proper development and growth of children The increased number of people who are advancing in age and still want to be energized so as to remain active in their public and social lives 2.0 The company’s earnings announcement The company has growth to be among the leading natural health provider in Australia due to its high quality health products. Following its consistency in performance, the company was listed in Australian Securities Exchange Market and to date controls close to 20% of the Australian market share. The company has a good history in terms of financial growth with its reported earnings per share increasing each and every financial year. On analyzing previously announced financial results for the last few financial years, the company reported a very high value in terms of earnings per share in the year 2007, which hit 14.6%. The rate remain consistently high until the year 2013 when it dropped to 10.2% The financial results reported in the subsequent years, saw an upward trend in revenue generated while the earnings per share remains constant. The market analysts had predicted changes during the subsequent financial results reporting. They had hopes of Blackmore Ltd announcing an increase in earnings per share during the half year financial results of 2014. Therefore, when the company announced its half year financial results of 2014 on 26th February 2015, which had reported the following Revenue realized was $206.4m having increased by 22% in comparison to the previous corresponding period. The company’s management had announced a significant increase in interim dividends to be paid out, that is, 0.68 compared to the previous 0.31 The working capital increased by 118% to $29m when compared to the amount reported during the last corresponding period. The company reported an increase in its net income after tax from $8.56m from the previous corresponding period to $18.6m 3.0 Impact of the Earnings’ Announcement Following this announcement made on 26th February, 2015, the following were the developments in the stock market:- Based on the analysis of the data derived from the Australian Securities Exchange regarding the prices of share of Blackmore Ltd and all-ordinaries stock index, the trend of investment in the company shares seem to have changed with the announcement of its half year shares hence leading to the changes in its share prices. According to the data gathered from the Austrian Securities Exchange, three weeks prior to the company’s announcement of its half-year earnings, the share prices was relatively low, for instance on 5th February, 2015 the company’s share price was at $44.00 which increased to $44.70 on the following day, the rate of return based on the increase in share price was 1.59%, on the other hand all-ordinaries stock index value as at 05th February. 2015 that is, three weeks to company’s announcement of its earnings was $5,765.50 which slightly increased to $5,774.50 on the day after, thus reporting a positive rate of return of 0.16%. Therefore, on gauging the company’s share prices against the all-ordinaries stock index, the company reported a positive residual return rate of 1.43% The company’s share prices during that period to announcement was fluctuating upwards and downwards as well as all-ordinaries stock index values, there the a cumulative residual return was consistency negative prior to the announcement date which was on 26th February, 2015. On the earnings’ announcement date, the share price was $44.00 while the All-ordinaries stock index as reported by the Austrian Securities Exchange was $5,877.90, a day after the company announced its financial results which acknowledged the interim dividend payment to have increased from 0.31 to 0.68, the company’s share price increased immediately to $45.00 while the All-ordinaries stock index reported was $5,877.90, based on that increase, the residual return improved by 0.35 and influencing the cumulative residual which increased as well. Therefore, as reflected in the graph chart, the cumulative residual rate increased steadily after the announcement of the company’s half year earnings. 4.0 Conclusion The analyzed data shows that, three weeks post earnings’ announcement, the investors still had high hopes in the value of the company’s shares and thus invested as much as they could. The cumulative residual returns remain positive throughout the entire three weeks after the release of financial results. As stated to Ray Ball (1995), the stock market is not 100% efficient in understanding investors’ behavior, which despite understanding the trend of the stock prices, there is some binding precincts in relation to asset pricing models that trigger the empirical tests of the efficiency in the market. This aspect makes it impossible to conclude that Blackmore Limited’s share prices can immediately restore equilibrium in response to the earnings’ announcement particularly with regard to extreme reservations. Therefore, the trend of the cumulative residual returns does not and may not sufficiently address the real issue in regard to current market efficiency. APPENDIX: DATA ANALYSIS A. Tables-Rate of Returns and Residuals Daily Returns and S&P/ASX200 Index of Blackmore Ltd 5th February 2015 to 19th March 2015 Table 1   Price Data Rate of Return (Daily)     Day Blackmore Share Price ($) S&P/ASX200 Index Blackmore Share S&P/ASX200 Index Residual Return Cumulative Residual Return 05-Feb-15 44.00 5,765.5         06-Feb-15 44.70 5,774.7 1.59% 0.16% 1.43% 1.43% 09-Feb-15 44.25 5,770.1 -1.01% -0.08% -0.93% 0.50% 10-Feb-15 43.48 5,757.4 -1.74% -0.22% -1.52% -1.02% 11-Feb-15 41.65 5,731.7 -4.21% -0.45% -3.76% -4.78% 12-Feb-15 42.36 5,707.7 1.70% -0.42% 2.12% -2.65% 13-Feb-15 41.85 5,835.5 -1.20% 2.24% -3.44% -6.10% 16-Feb-15 42.42 5,849.5 1.36% 0.24% 1.12% -4.98% 17-Feb-15 43.13 5,822.3 1.67% -0.46% 2.14% -2.84% 18-Feb-15 41.70 5,877.9 -3.32% 0.95% -4.27% -7.11% 19-Feb-15 41.55 5,869.8 -0.36% -0.14% -0.22% -7.33% 20-Feb-15 43.05 5,845.6 3.61% -0.41% 4.02% -3.31% 23-Feb-15 43.50 5,872.4 1.05% 0.46% 0.59% -2.72% 24-Feb-15 42.80 5,890.0 -1.61% 0.30% -1.91% -4.63% 25-Feb-15 42.20 5,908.6 -1.40% 0.32% -1.72% -6.35% 26-Feb-15 44.00 5,877.9 4.27% -0.52% 4.78% -1.56% 27-Feb-15 45.00 5,898.5 2.27% 0.35% 1.92% 0.36% 02-Mar-15 46.30 5,926.3 2.89% 0.47% 2.42% 2.78% 03-Mar-15 45.60 5,902.9 -1.51% -0.39% -1.12% 1.66% 04-Mar-15 47.80 5,871.5 4.82% -0.53% 5.36% 7.02% 05-Mar-15 48.78 5,873.7 2.05% 0.04% 2.01% 9.03% 06-Mar-15 48.69 5,868.6 -0.18% -0.09% -0.10% 8.93% 09-Mar-15 48.95 5,793.0 0.53% -1.29% 1.82% 10.75% 10-Mar-15 48.27 5,794.3 -1.39% 0.02% -1.41% 9.34% 11-Mar-15 47.82 5,763.3 -0.93% -0.54% -0.40% 8.95% 12-Mar-15 47.85 5,816.0 0.06% 0.91% -0.85% 8.09% 13-Mar-15 47.65 5,788.0 -0.42% -0.48% 0.06% 8.16% 16-Mar-15 48.12 5,769.7 0.99% -0.32% 1.30% 9.46% 17-Mar-15 47.50 5,811.0 -1.29% 0.72% -2.00% 7.46% 18-Mar-15 47.35 5,808.0 -0.32% -0.05% -0.26% 7.19% 19-Mar-15 48.20 5,912.5 1.80% 1.80% 0.00% 7.19% Source: Yahoo!7 Finance           B. Charting Price and Cumulative Returns Figure 1 Figure:2 BIBLIOGRAPHY “Blackmore Limited.” Encyclopedia Britannia online www.blackmores.com.au accessed on 12th May 2015 Austrian Securities Exchange website. “ASX Bookbuild Announcements.” www.asx.com.au/ accessed on 12th May 2015 Ball, Ray. 1995 "The theory of stock market efficiency: accomplishments and limitations." Journal of applied corporate finance: 4-17 Yahoo! 7Finance. “au.finance.yahoo.com” accessed on 12th May 2015 Read More