The Sequoia Fund thought the A2 Milk Company Ltd (ASX: A2M) share price was a buy during the December 2018 quarter.
The Sequoia Fund outperformed the S&P 500 Index over the last quarter, the 2018 calendar year and since inception in July 1970. Clearly outperforming the S&P 500 Index over a long period of time means it could be worth learning what the Sequoia investment team think about A2 Milk.
The investment team say they are long-term business owners and believe that the only reliable way to invest is to carefully evaluate the long-term prospects of the businesses behind the stocks.
In the Sequoia Fund's December 2018 letter, the company first gave a little background about the a2 protein concept. They wrote that scientists believe five to ten thousand years ago some cows developed a mutation that changed the milk produced to include a protein called A1, which then spread to most of the global population. Originally, supposedly, cow milk and mother milk only had the A2 protein.
The Sequoia team suggested that A2 Milk is trying to do what Fage and Chobani have done – turn a commodity product into a compelling quality brand.
A2 has made good progress by becoming the leading premium milk brand in Australia whilst making rapid inroads into the massive and quality-obsessed infant formula market in China. Expansion into the US also looks promising.
With good execution, particularly in China, Sequoia thinks A2 could become a much larger business than it is today, more than justifying the high price/earnings ratio they paid for shares.
A2 Milk is riding powerful consumer trends favouring products perceived to be healthy and natural, although management will have to navigate a "thorny distribution landscape" in China.
Foolish takeaway
I can see why they wanted to buy A2 Milk shares – it's a high quality business with global growth prospects with consistent (and growing) demand for its staple products.
A2 Milk is trading at just under 36x FY19's estimated earnings. So it's not exactly cheap, but it does have a very compelling future. I'd be willing to buy a small parcel today and accumulate more on weakness over time.
