The Bellamy's Australia Ltd (ASX: BAL) share price will be one to watch on Wednesday after the organic infant formula company was the subject of a broker note out of Goldman Sachs.
According to the note, the broker has held firm with its buy rating but slashed the price target on its shares by a sizeable 18% to $21.00 from $25.70.
It is worth noting, though, that this reduced price target still implies potential upside of almost 40% for its shares over the next 12 months.
Why has Goldman Sachs cut its price target?
Although Goldman remains confident in Bellamy's long-term outlook, it has cut its price target due to expectations that its CFDA approval is likely to be delayed by a number of months.
This is because Bellamy's is submitting an application for a reformulated product rather than its existing product, which the broker suspects could add some complications to the approval process.
In addition to this, the broker is concerned that tensions between the governments of Australia and China could slowdown the CFDA approval process.
CFDA approval is required to sell Chinese labelled product in China. Any delays to its CFDA approval will inevitably limit its sales in FY 2019, possibly to the advantage of rival A2 Milk Company Ltd (ASX: A2M).
All in all, Goldman has reduced its earnings forecasts by 1% this year and 22% in FY 2019, which means earnings per share of 40 cents in FY 2018 and 56 cents next year.
Based on this forecast Bellamy's shares are currently changing hands at 27x estimated FY 2019 earnings.
Should you invest?
Whilst any delays to CFDA approval would be disappointing, I agree with Goldman that this is a long-term play for patient investors.
Its shares may not be cheap but given its growth profile I think 27x estimated FY 2019 earnings is a fair price to pay and would suggest that investors consider snapping up shares on any weakness.
While I might still choose a2 Milk ahead of it, it wouldn't be far behind. Further, I feel it is vastly superior to up and comers such as Bubs Australia Ltd (ASX: BUB) and Wattle Health Australia Ltd (ASX: WHA).
