Is this why the a2 Milk Company Ltd (Australia) share price is soaring today?

Credit: Benjamin Horn

It’s been a rather glum day for the broader share market, but not so for shareholders of a2 Milk Company Ltd (Australia) (ASX: A2M). The company’s share price has risen 7.4% at the time of writing to trade just beneath $1.41 per share.

Unfortunately, it is unclear why a2 Milk’s share price is rallying so hard today, given the lack of news from the company lately. It also doesn’t help that shares of its rival Bellamy’s Australia Ltd (ASX: BAL) are trading 0.1% lower today, while Blackmores Limited (ASX: BKL) – which is predominantly a supplier of vitamins – is also trading 3.1% lower.

Indeed, a selloff of the shares over the past two sessions may have attracted some investors. Despite today’s gain, the shares are still trading below their closing price from Friday, with some investors perhaps deciding they were oversold.

In April, the company guided for full-year revenue in the range of $335 million to $350 million while it also said it expected group operating EBITDA (earnings before interest, tax, depreciation and amortisation) to be the range of $45 million to $49 million.

Net profit for the first half was $10.1 million. Given that guidance for full-year EBITDA implied a stronger second-half than first-half result, I would also expect second-half EBIT and net profit after tax (NPAT) to be greater as well, putting full-year NPAT north of $20 million. Even with that result, however, the shares would still be trading at a lofty premium given the company’s market value of almost $1 billion.

In saying that, however, there is certainly the potential for strong growth in the infant formula market, particularly in China where residents have developed a distrust for China-made baby formula products.

Of course, recent regulatory moves have cast a shadow over short-term demand and exactly what it means for suppliers to the region, but there is certainly scope for a2 Milk, as well as Bellamy’s and Blackmores, to continue growing their sales and earnings.

a2 Milk was one of the strongest performing shares on the market in the latter half of 2015 and, given its market value today, investors shouldn’t expect the shares to skyrocket again anytime soon. However, they could still be worth a closer look by long-term investors willing to accept a little more risk during a time of heightened uncertainty.

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Motley Fool contributor Ryan Newman owns shares of Bellamy's Australia. 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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