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Why the A2 MILK FPO NZ share price has soared 125% in two weeks

milk
Credit: Bertalan Szürös

The A2 MILK FPO NZ (ASX: A2M) share price continued to soar today, backing up yesterday’s 14.7% gain by adding another 18 cents or 8.4% this morning.

The shares are now trading for $2.33 each, after trading at a low of just 45.5 cents in May this year. That represents an incredible 412% jump and comes despite a capital raising which was announced in October. It also compares to a decline of nearly 7% for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) in the same time.

As can be seen in the chart below, the shares have also more than doubled in price in the last fortnight (they traded for $1.035 on 17 December).

Source: Google Finance

Source: Google Finance

Although the company hasn’t released any news since before Christmas, it appears investors are still milking (excuse the pun) its latest announcement for all its worth.

A2 Milk is a New Zealand-based dairy producer which also produces what is shaping up to be one of the most popular infant formula products in the world. With demand running red hot for baby formula right now – especially in China – the A2 Milk Company has experienced massive sales growth which led it to upgrade its forecast guidance again for the 2016 financial year.

On 18 December, it said it expects group revenue for the year to be between $300 million and $315 million, while earnings before interest, tax, depreciation and amortisation (EBITDA) is tipped to be between $33 million and $37 million. That contrasts to prior guidance of $285 million in revenue and EBITDA of just $22 million – both of which had been updated as recently as November 17!

Indeed, A2 Milk’s rival Bellamy’s Australia Ltd (ASX: BAL) has also experienced incredible growth this year and its shares have also risen 4.3% today to trade at $16.15. Considering Australian pharmacies and supermarkets are both still struggling to maintain infant formula stock on their shelves (it’s simply selling too quickly), 2016 could be shaping up as another big year for the pair.

In saying that, neither companies’ shares are ‘cheap’ at their current prices. While further share price gains are possible, investors should always conduct their own due diligence to decide whether that seems likely.

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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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