Why Bellamy’s Australia Ltd (ASX:BAL) shares are sinking lower today

One of the worst performers on the market on Friday has been the Bellamy’s Australia Ltd (ASX: BAL) share price.

In early afternoon trade the organic infant formula company’s shares are down almost 6% to $16.92.

Why are Bellamy’s shares sinking lower?

While today’s decline could be a case of profit taking after a series of strong gains, it could also be related to the release of a broker note this morning.

According to a note of Morgans, the broker has downgraded Bellamy’s shares to a hold rating from an add (buy) rating. Its analysts have, however, raised the price target on its shares to $18.50.

Although Morgans believes that the company’s decision to increase organic milk supply is a good one, this is not something that will change overnight. The broker estimates that it could take as much as three years to convert enough normal farms to organic produce to make a material increase to supply.

In addition to this, the broker appears a little concerned with the lack of news on the CFDA front. If Bellamy’s doesn’t receive its approval to sell products on the China mainland in the near future, it could mean downside risk to the broker’s FY 2019 earnings forecasts.

But not everyone is lukewarm on Bellamy’s. In fact, Citi also released a note in response to yesterday’s announcement. That note revealed that its analysts have retained their buy rating and $22.00 price target.

Should you invest?

I think that Bellamy’s would be a great buy and hold investment along with industry rival A2 Milk Company Ltd (ASX: A2M). While its shares are likely to remain volatile until its CFDA approval has been granted, I think it is worth riding this out.

Especially after its sizeable decline from its all-time high has left its shares trading at an attractive level once again. Based on Citi’s forecasts, Bellamy’s shares are currently changing hands at 25x estimated FY 2019 earnings. I think this is reasonable for the company given its growth profile.

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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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