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A2 Milk Company Ltd shares crushed: Should you buy the dip?

share price down
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In morning trade the A2 Milk Company Ltd (ASX: A2M) share price has been crushed following the release of a trading update and full-year outlook.

At the time of writing the A2 Milk Company share price has just opened the day down a sizeable 19% to $9.72.

What happened?

This morning the fast-growing infant formula and dairy company reported that total revenue for the nine months to March 31 was NZ$660 million, up 70% on the prior corresponding period.

Management believes this puts it on course to deliver total revenue of between NZ$900 million and NZ$920 million in FY 2018. This will be an increase of 64% to 67% on FY 2017’s result.

While this is undoubtedly a strong result, it has fallen short of the market’s lofty expectations for revenue of circa NZ$950 million.

Because a2 Milk Company’s shares are priced to perfection and at a significant premium to the market average, a miss of this nature is always going to get punished unfortunately.

Is this a buying opportunity?

While I would suggest investors let the dust settle first, I do think that this sizeable decline is a buying opportunity.

Today’s decline is clearly a big disappointment for shareholders, but I have little doubt in my mind that the company’s shares will be significantly higher than the last close price within a couple of years or even sooner.

So rather than rushing to sell on this news, it could pay for shareholders to hold on patiently for the long-term. And should your portfolio be diverse enough, it could even be worth averaging down once its share price settles.

After all, this is a company which is experiencing such incredible demand for its products that supermarkets have had to restrict purchases and put product behind the counter.

The same applies for rival Bellamy’s Australia Ltd (ASX: BAL) which has also been dragged down on the back of this news.

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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 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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