Top broker says a2 Milk Company Ltd (Australia) shares are worth $7.25

The a2 Milk Company Ltd (Australia) (ASX:A2M) share price could be on its way to $7.25 according to one leading broker…

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

On Tuesday the a2 Milk Company Ltd (Australia) (ASX: A2M) share price took a tumble after Deutsche Bank downgraded the dairy company's shares to a hold rating.

According to the note, the broker didn't see enough value in its shares at the current price to maintain its buy rating.

But not everyone feels the same way.

According to a note out Goldman Sachs, its analysts have upgraded a2 Milk's shares to a buy rating with a massive $7.25 price target.

This price target implies a potential return of over 20% from the last close price. Not bad considering its shares are already up 194% since the turn of the year.

Analysts at Goldman think that strong infant formula sales and gross margin expansion will lead to earnings growth 9% ahead of the median consensus estimates for FY 2018.

This is expected to be driven by the higher margin offline channel in China. Goldman estimates that this channel generated circa 8% of sales in FY 2017, but will grow to around 15% in FY 2018.

Should you invest?

Based on Goldman's forecasts a2 Milk's shares are changing hands at 31x forward earnings. This is arguably quite reasonable given its current growth profile.

But at this stage it is unclear whether the broker's forecasts are accurate or not. So for now I would continue to class it as a hold and suggest investors wait for the company to update the market at its mid-November annual general meeting.

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

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »