The A2 Milk Company Ltd (ASX: A2M) share price has surged a whopping 2,755% higher since its April 2015 IPO – but is the share price growth train coming to an end for a2 Milk?
What has caused a2 Milk’s share price to surge higher?
The a2 Milk share price has managed to climb 53.7% higher so far this year as the S&P/ASX 200 (INDEXASX: XJO) index enjoyed its best start to the year since 1991.
The company remains in the box seat amongst the New Zealand-based infant and baby formula companies and has managed to outpace its Aussie rivals including Bellamy’s Australia Ltd (ASX: BAL) and Wattle Health Australia Ltd (ASX: WHA).
a2 Milk’s equity has been a top performing growth stock over the last 4 years or so as it has cleared regulatory hurdles and expanded its channels both at home and abroad.
One key that unlocked significant capital gains for a2 Milk was its regulatory approval in China to capture large swathes of the lucrative infant and baby formula market, as well as its mainstream dairy products in Aussie supermarkets.
a2 Milk has also been very clever in marketing the a2 advantage in its milk, which has seen sales soar. The company’s share price has kept pace with sales, soaring to its current $16.00 valuation.
Why the growth train may be slowing this year
While a2 has delivered outstanding capital gains for its initial investors, I think the potential upside for the stock is limited in the second half of the year.
There is increasing competition in the market and the likes of Bellamy’s and Wattle Health have been pressuring margins and signing big contracts as they capture a larger chunk of the market.
While a2 Milk remains the incumbent, recent changes in the Chinese regulatory environment have put pressure on foreign suppliers (i.e. from Australia and New Zealand) to await approval from China’s food and drug administrators.
I think some of the smaller players such as Wattle Health or Bubs Australia Ltd (ASX: BUB) have significant upside and could deliver stronger capital gains over the next 5 years or so.
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Motley Fool contributor Kenneth Hall 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.