A2 MILK FPO NZ share price surges 45%: Can it go higher from here?

The share price of A2 MILK FPO NZ (ASX: A2M) has fallen 1.9% today, but shareholders have little reason to complain. After all, their shares have risen an impressive 45.5% over the last month and 128.6% since bottoming out in May this year.

A2 Milk is a New Zealand-based dairy company which supplies milk and milk-related products. What differentiates A2 Milk from other brands however, is that it claims its products only contain the A2 protein and exclude A1 proteins which can cause stomach irritation in some consumers.

While many Australian and New Zealand-based dairy businesses are well positioned to benefit from the world’s growing population, especially in China, A2 Milk’s real driver of growth recently has been its infant formula product.

Indeed, demand for infant formula has boomed recently, with A2 Milk, Karicare and Bellamy’s Australia Ltd (ASX: BAL) amongst the most popular brands. These tins of so-called “white gold” have typically sold out within minutes of them hitting the supermarket shelves recently, sparking a severe shortage of the products.

Roughly two weeks ago, A2 Milk provided investors with a trading update and now expects EBITDA (earnings before interest, tax, depreciation and amortisation) of $22 million, up from prvious guidance of just $12 million. Revenue was also forecast to hit $267 million, but is now expected to be $285 million.

The group’s Managing Director and CEO, Geoffrey Babidge, said: “Infant formula is emerging as a more significant growth driver for the Company.” The product represented 47% of group revenue for the first four months to 31 October 2015 at $38 million, up from just $8.7 million in the same period last year. It’s easy to see why investors are so excited to own A2 Milk’s shares.

Can the share price go higher?

Although the enormous share price growth amongst companies like A2 Milk, Bellamy’s and Blackmores Limited (ASX: BKL) has sparked concerns of a potential bubble within the sector, share prices could actually continue to rise if demand continues to grow. Of course, shares of these companies are by no means ‘cheap’ but long-term shareholders could still be rewarded for staying on for the ride.

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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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