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Why the A2 MILK FPO NZ share price is soaring today

Credit: kilmousk

The A2 MILK FPO NZ (ASX: A2M) share price has soared more than 10% today, and rose as much as 14.3% earlier in the session on very high volumes. By comparison, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has fallen 0.4%.

A2 Milk is the company behind various dairy products which contain specific proteins which the company claims to help consumers avoid stomach pain and nausea associated with A1 proteins. This includes milk and cream, as well as infant formula which has skyrocketed in demand recently.

Indeed, the company provided an update into its operations one week ago saying that it had made a “very positive start” to the 2016 financial year with infant formula “emerging as a more significant growth driver for the company.”

In fact, in the first four months of the financial year, sales of the product soared more than 300% to $38 million, up from $8.7 million during the same period last year. Sales from the product now represent a whopping 47% of group revenue.

What’s driving this growth?

From toys and clothing to health and wellbeing, parents inherently want the best for their children. Australian and New Zealand dairy companies are well-known for their high-quality products with demand soaring locally, as well as internationally.

Indeed, China is one of the markets with the greatest growth prospects, especially since the nation scrapped its 35-year long one-child policy.

Anecdotal evidence even suggests infant formula is flying off Australian retail shelves only to be on-sold to Chinese residents via the internet, forcing major chains like Woolworths Limited (ASX: WOW) and Coles, owned by Wesfarmers Ltd (ASX: WES), to enforce limits on how many tins each customer can buy per transaction. Bellamy’s Australia Ltd (ASX: BAL) has also been a huge beneficiary of this trend.

As a result of this demand, A2 Milk upgraded its EBITDA (earnings before interest, tax, depreciation and amortisation) guidance to $22 million for the full-year, up from previous guidance of just $12 million.

Should you buy?

There’s no doubt that investors are excited about baby formula right now, which is driving up share prices across the sector.

Encouragingly, one of the company’s directors, Julia Hoare, recently acquired 50,000 shares in the business. While there are plenty of reasons why a director might want to sell shares, there’s generally only one reason why they would want to buy. With that considered, together with the enormous growth in demand for its products, there could still be more gains to come.

That doesn’t bode so well for Freedom Foods Group Ltd (ASX: FNP) however, which recently sold its remaining stake in the group for just 85 cents per share, just before the announcement was made. Unfortunately for them, the share price has climbed another 33.3% in the time since.

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Motley Fool contributor Ryan Newman owns shares of Bellamy's Australia. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia owns shares of Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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