- A2 Milk share price is down 20% since the end of July 2019.
- Despite growing FY19 revenue by 41.4% & net profit by 47%.
- Expected to continue double digit growth.
- A2 Milk is a quality growth stock selling at an attractive price.
The A2 Milk Company Ltd (ASX: A2M) share price has been battered in recent months after a slight miss in earnings caused the stock to lose around 20% of its value since July 2019. This is despite reporting record financial results; growing FY19 revenue by 41.4%, growing EBITDA by 46.1% and growing EPS 45.4% to 39 cents a share.
It is clear to me that we had a case of A2M being priced for perfection, in a trade environment that makes perfection impossible. And now that we have had a chance for prices to correct, A2M is now looking very attractive to the value investor looking for their next opportunity.
For those of you who are not aware, The A2 Milk Company is an ASX 200 publicly listed company that commercialises intellectual property relating to its premium dairy products that contain only the "A2" beta casein protein. Most traditional milk contains both A1 and A2 protein. A2 milk claims that their milk is easier to digest and is widely considered a ‘market darling’ in Australia.
It is important to understand that the key to A2M’s future strategy is its international expansion into China and the US. While the revenue and profit numbers are good, I thought it was even better to see that the infant formula value share in China grew to 6.4%, and US revenue had grown 161% and store distribution had more than doubled.
China especially is a fantastic growth market for A2M that is is expected to bring high demand for years to come. Since the 2008 chinese milk scandal where melamine-laced baby formula killed 6 infants and made 300,000 sick, the country has frequent shortages of so-call ‘safe’ baby formula. It is a routine occurrence where chinese personal shoppers, commonly referred to as “daigou” show up in Australian supermarkets to purchase entire shelves of premium baby formula (A2’s ‘Platinum’ being one of the most sought after), so it can be re-sold in China at a large markup.
The overseas markets are critical for A2M’s future success and the company knows this. Marketing expenses have nearly doubled YoY and are expected to increase through FY20,21. It is expected that this will have some material impact on EBITDA margin, it was 28.2% in the second half of FY19. And while this may be enough to spook some investors, it is a necessary investment to expand the brand into these new markets.
A2 Milk is expected to continue its double digit growth into FY20 and FY21. A2 milk is a strong brand with a good reputation for quality, while delivering above average returns in the highly saturated nutrition sector. I think that A2 milk is a quality business that is poised for success. A2M is currently trading at around 8x sales and, while this is not super cheap I believe with the expected profit growth in the coming years it is worth it when you compare it against many other high valuation ASX growth stocks.
Analyst's Disclosure: I am/we are long ACOPF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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