A2 Milk Company Ltd has (ASX: A2M) rose 29% YTD for a $14.63 close on Monday. The company has demonstrated strong business performance to date. Despite concerns over a slowing China, A2 Milk is still a buy for me. Here's why.
A2 Milk is an Australian company that sells A1 protein-free milk. Its key product categories are infant formula, liquid milk and milk powders.
Product Performance
A2 Milk posted fantastic HY results. EBITDA was up 52.7% to $218.4 million, driving EPS up 52.9% to 20.9 cents. This was a result of strong regional performance in its key product segments:
• Sales of infant formulas increased 45.3% in China and Australia to $495.5 million
• Liquid milk up 20.2% to $83.4 million primarily due to US and Australia sales
• Milk powders were the key product driving the 40.4% growth in nutritional products, generating $34.3 million revenue
International Presence
What has been especially impressive has been A2 Milk's international expansion. Previous concerns over a slowing China have been turned on its head. The China segment grew 50.1% due to strong distribution and rising market share.
Similarly, sales in the US grew 114.1% due to increased brand awareness and a stronger distribution channel.
A key driver here was the increased spending on marketing and brand building activities in these segments by 75%. Marketing spend will be ramped up in the second half of the year and its results will be closely watched in the company's FY results.
Competition
Bellamy's Australia Limited (ASX: BAL) had a modest earnings period, but its strategic changes stabilised investor returns. Rebranding plans and changes to its infant formula are expected to win over Chinese consumers. However, Bellamy's is still struggling to secure its SAMR accreditation which hinders it from being able to compete with A2 Milk through Diagou channels.
Keytone Dairy Corporation Limited (ASX: KTD) is a relatively new player in the market. It has only recently launched two new premium powder products in January this year. Its set down strong foundations, having received accreditations for food safety and quality. Revenue was also up by 18% in the most recently published quarter. It's still early days for Keytone, but one to watch if you're interested in the category.
Foolish Takeaway
A2 Milk is operating on a high 81x earnings multiple. This factors in such strong HY earnings results and high expectations for FY. On top of strong product sales, the company is growing its international presence. It's easy to see why investors are willing to pay the price.
In comparison, Bellamy's has a 39PE ratio while Keytone remains unprofitable with a market cap of 52.5 million. Both options have clear long-term potential, but as a growth investor my cheques are going to A2 Milk.
