Why it could be a good time to buy A2 Milk Company Ltd shares

The A2 Milk Company Ltd (ASX: A2M) share price may be trading lower today, but there could be sizeable gains ahead if one leading broker’s target is realised.

According to a research note out of the Macquarie Group Ltd (ASX: MQG) equities desk, its analysts have retained their outperform rating and $8.29 price target following the dairy company’s recent update.

Macquarie appears pleased to see a2 Milk expand into the north east of the United States, growing its footprint from 3,700 retail stores to approximately 5,000 retail stores.

The company made the move after achieving sales-based targets across other regions including the south east and California.

Its expansion into the north east is a smart move in my opinion due to the size of the market. The north east of the United States is home to 60 million consumers and accounts for around 20% of the nation’s total milk category volume.

Furthermore, Macquarie believes there is potential upside from new product launches.

Management didn’t give much away in its update, but advised that it is “investigating specific new product opportunities for the US market to further capitalise on the growing brand awareness and expanded distribution.”

Should you invest?

Macquarie’s price target implies potential upside of approximately 9% for a2 Milk’s shares over the next 12 months. If its shares were to climb to this level it would place them on a forward price-to-earnings ratio of 40x.

While this is a premium over the market average, I think it is good value for the growth that the company is exhibiting.

After all, Macquarie estimates that a2 Milk will deliver earnings per share of 20.6 cents this year, around 76% higher than a year earlier.

All in all, I think a2 Milk would be a great investment option alongside industry peers Bellamy’s Australia Ltd (ASX: BAL) and Blackmores Limited (ASX: BKL).

Finally, if you like growth shares like a2 Milk, then I think you'll love these hot growth shares.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Blackmores Limited. 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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