Why A2 Milk Company Ltd (ASX:A2M) shares are sinking lower

The A2 Milk Company Ltd (ASX: A2M) share price has continued its poor run with another decline this morning.

At the time of writing the infant formula and dairy company’s shares are down 2% to $9.40. This means they have now fallen a sizeable 32% from their 52-week high.

Why are a2 Milk Company’s shares sinking lower today?

With no meaningful news out of the company today, I suspect that this decline is attributable to a broker note out of Citi.

According to the note, the broker has downgraded a2 Milk Company’s shares to a sell rating from neutral and slashed the price target on them from $10.90 to $9.50.

The broker has made the move on the back of concerns that excess inventory could be building in the local market. It fears that this could potentially impact its FY 2019 results and has downgraded its earnings estimates accordingly.

The broker now expects earnings per share of 29.1 cents in FY 2019, around 10% lower than the consensus estimate. This will mean earnings growth of approximately 24% next year.

Should you sell?

I certainly would not be a seller at these levels, especially given that its share price has now drifted below Citi’s price target.

Based on Citi’s estimate, a2 Milk Company’s shares are changing hands at 32x forward earnings. I think this is more than reasonable for a company growing earnings at such a strong rate.

However, I still see more value in the shares of rival Bellamy’s Australia Ltd (ASX: BAL).

As does Citi. It has rated the organic infant formula company’s shares as a buy with a price target of $19.70. This massive price target has been cut slightly to account for probable delays in it achieving CFDA accreditation in China, but still implies potential upside of approximately 84%. This could make it a great option for investors after recent declines.

As well as a2 Milk Company and Bellamy's I think these mid cap stars are in the buy zone...

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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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