Up 35% in 30 days: Is it time to buy a2 Milk Company Ltd (Australia)?

Credit: Benjamin Horn

In the last 30 days the share price of a2 Milk Company Ltd (Australia) (ASX: A2M) has skyrocketed by an incredible 35%. The catalyst for this sudden rise was a profit upgrade announcement in the middle of June.

As you might have guessed, it was a very positive revision. The specialist milk and baby formula retailer advised the market that it was expecting full year operating earnings before interest, tax, depreciation, and amortisation (EBITDA) to come in between $52 million and $54 million.

Previous guidance given in its February half year report was for full year EBITDA to be in the range of $45 million to $49 million. Whilst investors were clearly impressed by the company’s strong performance, I feel it is its growth prospects which really got them excited.

This year there were a number of changes to the infant formula regulatory environment in the China market. These included the taxation of cross-border e-commerce and an infant formula registration rule for domestic and imported infant formula products into the country.

These changes sparked a panic and caused a2 Milk, Blackmores Limited (ASX: BKL), and Bellamy’s Australia Ltd (ASX: BAL) shares to sell off. Both Blackmores and a2 Milk have brushed off these concerns. In its market update a2 Milk’s management appeared bullish on China and said it believes it is well placed to comply with any potential changes in the regulatory environment.

I believe this is exactly what investors wanted to hear, as the China market is undoubtedly where the long term earnings growth will come from in my opinion.

In its recent investor presentation, a2 Milk advised that demand for its a2 Platinum infant formula continues to grow amongst Chinese mothers. So much so infant formula sales have grown now to contribute 53% of total sales. Because of this company sales are now expected to rise by at least 162% in FY 2016.

It isn’t hard to see why the shares have risen so much in the last month, but will they keep rising? That is of course the million dollar question.

Personally I believe the company is positioned to keep sales growing at a strong level thanks to its growth strategy of building a high profile premium brand and increasing its direct sales into China. If it succeeds in doing this then I would not be surprised to see its shares make a run higher.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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