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Are A2 Milk Company Ltd (ASX:A2M) shares in the buy zone?

Despite a sizeable decline from its 52-week high, the A2 Milk Company Ltd (ASX: A2M) share price has still been one of the best performers during the last 12 months.

During this time the dairy and infant formula company’s shares have risen a remarkable 160%.

Are A2 Milk Company shares still in the buy zone?

I think they are and believe investors could be rewarded handsomely by being patient and holding onto them for the long-term.

I’m not alone in thinking this way. A note out of the Macquarie Group Ltd (ASX: MQG) equities desk today reveals that its analysts are bullish on the company’s prospects.

According to the note, the broker has retained its outperform rating and $12.40 price target on a2 Milk Company’s shares. This price target implies potential upside of almost 25% from the current share price.

While this note relates to the positives around the company launching a co-branded fresh milk product in New Zealand with Fonterra (ASX: FSF) and the belief that it could accelerate a2 Milk Company’s global expansion, the broker has previous talked up its long-term potential.

This is due to its belief that the company is creating value by building a business in a category that is both disruptive and growing.

Are its shares good value?

Macquarie estimates that a2 Milk Company will achieve earnings per share of 23.9 cents in FY 2018 and then 34.2 cents in FY 2019.

Based on this estimate its shares are changing hands at approximately 29x FY 2019 earnings, which I think is good value for a company expected to grow earnings by 43% next year.

However, as we have seen this year, if its earnings growth comes in lower than expected there is a danger that its shares could take a tumble.

But overall, I feel the risk/reward on offer here is sufficient. Though, I would still choose industry peer Bellamy’s Australia Ltd (ASX: BAL) ahead of it on valuation grounds.

As well as a2 Milk and Bellamy's, I would be buying these top mid cap shares this month.

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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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