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Should you buy A2 Milk Company Ltd (ASX:A2M) shares?

On Thursday the A2 Milk Company Ltd (ASX: A2M) share price failed to follow the market higher and sank lower following the release of its full-year guidance and outlook for FY 2019.

Its shares finished the day 3% lower at $10.50.

Is this a buying opportunity?

While I do see more value in Bellamy’s Australia Ltd (ASX: BAL) shares right now, I do think this is an opportunity to pick up a2 Milk Company’s shares at a fairer price.

I’m not alone in thinking this way. According to a note out of Goldman Sachs this morning, the broker has retained its buy rating on the company’s shares after yesterday’s update.

It has, however, reduced its price target by 4% to $12.20. This implies potential upside of approximately 16% for its shares over the next 12 months.

Goldman was pleased to see a2 Milk Company provided guidance of NZ$922 million, ahead of both its previous guidance range of NZ$900 million to NZ$920 million and the broker’s estimate of NZ$910 million.

So why has Goldman Sachs reduced its price target?

Goldman has reduced its price target after revising down its earnings estimates. Instead of earnings per share of 39 NZ cents in FY 2019 and 50 NZ cents in FY 2020, it now expects earnings per share of 35 NZ cents and 45 NZ cents, respectively. It still expects earnings per share of 25 NZ cents in FY 2018.

The broker has downgraded its earnings expectations in response to increased marketing initiatives. It now expects these increased costs to lead to its US/UK division breaking even in FY 2021, a year later than it had previously forecast.

Should you invest?

Based on Goldman’s estimates a2 Milk Company’s shares are priced at 33.5x FY 2019 earnings. Given that the broker expects earnings to grow at a compound annual growth rate of 53% through to FY 2020, I think this is a fair price to pay for its shares.

As such, I feel a2 Milk Company is a great long-term investment option along with infant formula rival Bellamy’s. I would suggest investors choose them ahead of smaller and unproven rivals Bubs Australia Ltd (ASX: BUB) and Wattle Health Australia Ltd (ASX: WHA).

Instead of Bubs and Wattle Health, I think one of these top shares could be the next growth star like a2 Milk

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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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