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Which shares are cheaper, Bellamy’s Australia Ltd or A2 Milk Company Ltd?

When investing in shares, it’s always best to consider a purchase from a variety of potential stocks – that is, don’t just buy the first stock that you see.  If you are looking at investing in baby formula, you want to compare the relative merits of a variety of companies in the industry including Bellamy’s Australia Ltd (ASX: BAL), A2 Milk Company Ltd (ASX: A2M)Blackmores Limited (ASX: BKL), and more.

Here is a comparison of the two biggest companies in the space at the moment, Bellamy’s and A2 Milk. All figures are from the first half results, unless stated otherwise.

Bellamy’s A2 Milk (all figures NZD)
Market capitalisation (the value of the company) $2,315 million (113.32m shares) NZ$9,533 million (730.54m shares)
Earnings per share in 2017 -$0.083 (reported a loss) $0.127
Earnings per share (first half 2018, doubled to approximate full year) $0.43 $0.273
Price to FY18 estimated earnings ratio (P/E) 47.5x 47.8x
Price to sales ratio 6.62x 13.98x
Net tangible assets $149 million $373 million
Net debt nil nil
Forecast earnings per share in Financial Year 2019 $0.611 (not available)

Surprisingly there is very little difference between the two companies. Relative to its market capitalisation, Bellamy’s has slightly more tangible assets (e.g. cash, equipment, and inventory), perhaps partly because it owns a manufacturing, facility whereas a2 does not.

Bellamy’s also looks cheaper on a price to sales ratio, primarily because the company is currently much less profitable – it earns less profit for every $1 of revenue than a2 Milk does. However, it looks as though both companies are being priced primarily on a price to earnings (P/E) ratio which is very similar – at 47.5x and 47.8x respectively. Note that the a2 Milk figures are all in NZ Dollars and I have drawn the stock price from the NZ stock exchange also.

While this table does not appear to differentiate the companies much, it does highlight one key risk – ‘if growth disappoints’. In my opinion, any mature consumer goods company, growing at a couple of % per annum, should be priced at around 12x-16x earnings – or 1/3rd current prices.

The market is currently pricing A2 Milk and Bellamy’s as though they will grow rapidly forever. They might, but the high price today is also a foreshadowing of what might happen if they don’t.

I’ve been wrong previously by suggesting that it might be time to trim some A2 Milk (I sold some of mine at ~$5) so I won’t make that call again. I will just say that prospective buyers today should have a strong grasp of each company’s prospects for continued growth before making a purchase.

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Motley Fool contributor Sean O'Neill owns shares of A2 Milk. 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 Scott Phillips.

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