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a2 Milk Company Ltd share price climbs 4.82%

The a2 Milk Company Ltd (ASX: A2M) grew by an exciting 4.82% today. The dairy company just can’t seem to stay away from big share price gains.

So, what happened today? Well, there was a fear last week that the tariff threats from President Donald Trump and China would lead to a trade war. Trade wars aren’t a good thing for anyone, but a trade war would be particularly bad for a company which sells a lot of product to China directly and indirectly.

It’s hard to put an exact number on how much product is eventually sold to Chinese parents in China, but it’s a large percentage of a2’s infant formula sales.

If the western world started falling out with China it could see Chinese demand for a2 products slow down considerably.

Things look a bit more positive now that a trade resolution is being worked on by the world’s two big economic superpowers.

A2 has seen tremendous growth in its revenue and profit figures in the past few years. Indeed, in its half-year report for the six months to 31 December 2017 it revealed that revenue grew by 70% to NZ$434.7 million and net profit grew by 150% to NZ$98.5 million.

Every six months investors doubt a2 can top its past result and justify the valuation, yet somehow it manages to do so. Indeed, a2 could drive further growth by growing in the north east of the US and the company is also creating more products such as its newly-released stage 4 infant formula.

Foolish takeaway

I wish I had bought a2 shares before now, but sadly I haven’t. It’s currently trading at 40x FY19’s estimated earnings. It’s hard to justify buying at today’s price, but I’ve missed out on a lot of growth by saying that over the last couple of years.

I’d be much more comfortable buying shares of these top businesses which are much more attractively valued.

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Motley Fool contributor Tristan Harrison 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 Scott Phillips.

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