How A2 MILK FPO NZ can help you profit from the baby formula boom

They call it ‘baby formula’, but I think a more apt title would be ‘liquid gold’ – at least until the oil price recovers and/or the supply of infant food increases.

It’s hard to imagine, but selling baby formula has catapulted Bellamy’s Australia Ltd (ASX: BAL) up 571% in the past twelve months, giving it a market cap of $1 billion dollars and a Price to Earnings (P/E) ratio well north of 100.

Perhaps it is no surprise then to discover that a number of other companies are hoping to muscle in on the boom, including Bellamy’s chief supplier Tatura, S&P/ASX 200 member Blackmores Limited (ASX: BKL), and relative newcomer, Kiwi company A2 MILK FPO NZ (ASX: A2M).

A2 Milk produces milk made with ‘A2’ proteins, designed to be more stomach-friendly than irritant ‘A1’ proteins. The company has done well since debut last year, although a recent profit update – showing that sales of infant formula were up 300% on the previous year – seems sure to light a fire under the share price.

Indeed, half of the company’s 78% rise for the year has come in the past month, as investors look for the next Bellamy’s. Management also announced that Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) were set to nearly double from $12m to $22m in this financial year.

As brand awareness grows and export operations start flowing more freely in the USA and commence in other target markets, sales growth appears likely to accelerate. Baby food looks sure to become the company’s biggest seller – it already makes up 47% of revenue – as A2M cashes in on rampant demand both here and in China.

With China recently scrapping its ‘one-child policy’, investors could be in for a baby boom that will further increase the demand for Australian baby formula, which is trusted for its quality.

Those looking to buy into A2 Milk would do well to remember that the company is currently unprofitable, although it looks to have a bright future ahead of it.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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