The a2 Milk Company Ltd (Australia) share price is up over 80% in 2017

Credit: Benjamin Horn

The a2 Milk Company Ltd (Australia) (ASX: A2M) share price is up 6% to $3.91 in afternoon trade after a range of brokers issued new valuations for the manufacturer of a2-only-protein milk and infant formula products.

According to financial new wires, broker Bell Potter has put a $4.22 share price target and “buy” rating on the company, after it upgraded its full year revenue guidance by $NZ20 million to NZ$545 million.

Notably, the latest guidance suggests sales are accelerating for the quarter ending June 30 2017, which is an important consideration for forward-looking analysts valuing stocks on estimations of discounted future cash flows.

Today’s rising stock price should come as little surprise then, as the company continues to report strong demand for its a2-only-protein infant formula from Chinese consumers in particular.

Thanks to the growing sales in China the company has also been investing relatively heavily in online marketing and promoting brand awareness for its infant formula in the country.

a2 Milk believes it now has around 3% of the Chinese infant formula market, although its “China label” infant formula product still only accounts for 7% of group infant formula sales.

In fact Chinese and Asian markets only accounted for around 15% of total group sales for the six-month period ending June 30 2017, with Australia still being the New Zealand-based group’s key market.

In ANZ the group believes it now has around one third of the infant formula market (including Daigou sales) thanks in part to the blunders at rival Bellamy’s Australia Ltd (ASX: BAL), while its a2-only-protein milk (commonly found on supermarket shelves) also continues to deliver robust sales growth in Australia.

The company is now attempting to replicate the a2-only-protein milk’s sales success in the far larger consumer markets of the US and UK, which will require some heavy investments in brand awareness and marketing to pay off.

Evidently, a2 Milk has several growth avenues ahead of it across the infant formula and premium-priced milk spaces, which means the stock may have room to run higher over a 3-5 year time horizon if consumers continue to buy into the superior quality of a2-only-protein milk. For now I would rate the stock as a hold, although investors with a long-term view may still do well from prices around $3.92 today.

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Motley Fool contributor Tom Richardson owns shares of A2 Milk.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of A2 Milk. 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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