Why I would buy A2 Milk Company Ltd (ASX:A2M) shares today

The A2 Milk Company Ltd (ASX: A2M) share price spent another day in the red on Wednesday.

This means the infant formula and dairy company’s shares have fallen 5.5% since this time last week and a massive 31% from their 52-week high.

Should you buy the dip?

While I expect that a2 Milk Company’s shares may remain volatile for the next few months, I believe investors that can handle the volatility would be rewarded handsomely with a patient buy and hold investment.

Especially with its shares trading on a reasonable earnings multiple of 27x estimated FY 2019 earnings. This is based on forecasts made by analysts at Macquarie Group Ltd (ASX: MQG) in a research note released last week.

While 27x earnings is still a significant premium over the market-average, I think it is great value considering the broker expects a2 Milk Company to grow its earnings per share by 43% next year.

But Macquarie isn’t the only one predicting strong growth. Analysts at Goldman Sachs are equally bullish on the company’s prospects.

For FY 2018 through to FY 2020, Goldman expects earnings per share of 25 NZ cents, 35 NZ cents, and 45 NZ cents, respectively.

In Australian cents this works out to be approximately 23 cents, 32 cents, and 41 cents at the current exchange rate. Which means earnings per share growth of 39% next year and 28% the year after.

Once again, I believe this level of growth makes a2 Milk Company attractive at the current share price.

But will a2 Milk Company deliver on expectations?

While its growth may have fallen a touch short of expectations this year, I believe this was partly down to inventory management as it transitioned to new packaging for its infant formula. I feel confident the underlying demand is still as strong as ever in China and with the transition now complete, I believe it is full steam ahead again.

In addition to this, with the footprint of its dairy products growing over the last few months through expansions in the U.S. and South Korea, I expect this side of the business to give its overall earnings a boost.

All in all, I think a2 Milk Company is a share to buy today along with sector peers Bellamy’s Australia Ltd (ASX: BAL) and Blackmores Limited (ASX: BKL).

Three more growing shares I would buy today are listed here.

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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 and has recommended Blackmores Limited. 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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