Why the a2 Milk Company share price could drop lower today

The A2 Milk Company Ltd (ASX:A2M) share price could drop lower today after the release of a trading update…

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The A2 Milk Company Ltd (ASX: A2M) share price looks likely to drop lower on Wednesday following the release of a trading update.

At the time of writing the fresh milk and infant formula company's New Zealand-listed shares are down 3%.

What was in the update?

Ahead of its appearance at the Macquarie Group Ltd (ASX: MQG) Australia Conference, a2 Milk Company released a presentation to the market which included an update on its performance through to March 31.

For the first nine months of FY 2019 the company has grown its revenue by 42% on the prior corresponding period to NZ$938 million. Management advised that this reflects continued sales growth in nutritional products and liquid milk.

This growth rate is just ahead of what it achieved in the first half when the company reported a 41% increase in revenue to NZ$613.1 million.

However, management has advised that this was the result of volume phasing associated with regulatory changes. This pulled forward orders and is expected to balance out in the fourth quarter.

In light of this, management has reiterated its revenue growth outlook for the second half to be broadly in line with the first half.

Management also held firm with its EBITDA margin guidance. This is expected to be notably lower than the first half due to its increased investment in marketing activities, resulting in a full year EBITDA margin in the range 31% to 32%.

What else was new?

The company has continued to win a greater slice of the Chinese infant formula market. Its share has grown to 6%, up from 5.4% at the end of December.

This appears to have been driven by its increased footprint in the massive market. The company's mother and baby store distribution now stands at ~13,600 stores, up from ~12,250 at the end of December.

Management also advised of further market share gains for both its fresh milk and infant formula in Australia and New Zealand. Its fresh milk has an ~11% value share and a2 Platinum infant formula has a ~36.8% value share, compared to 10.8% and 35.7%, respectively, at the end of December.

Finally, more progress has been made in the United States, with its distribution increasing to ~12,700 stores. The company has also extended its portfolio to include premium and natural coffee creamers.

Should you invest?

Earlier this week a2 Milk Company's shares raced to an all-time high. I suspect that some investors were betting on a guidance upgrade today and have been hitting the sell button (in New Zealand) when one failed to materialise.

Due to its strong long-term growth potential, I feel this selling ought to be considered a buying opportunity for investors that are prepared to make a buy and hold investment.

Overall, I would buy its shares along with Bellamy's Australia Ltd (ASX: BAL) and ahead of Bubs Australia Ltd (ASX: BUB).

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Bellamy's Australia and BUBS AUST FPO. 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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