The Motley Fool

When should the value investor buy A2 Milk shares?

The A2 Milk Company Ltd (ASX: A2M) share price has been battered over the past week after a slight earnings miss and disappointing results from its United States (US) and United Kingdom (UK) segments. But as a leading ASX 200 growth share and market darling, at what point does a2 Milk present both value and growth?

A2’s full-year result

Let’s first turn our eyes to a2’s full-year result, where the company saw record financial results and market share. It posted further momentum as revenues increased by 41.4%, EBITDA rose 46.1% and earnings per share up 45.4%.

It was pleasing to see a2 deliver record market share in key revenue segments, ANZ and China. Australia saw fresh milk revenue grow by 10.7% with record market share of 11.6%, while infant nutrition market shares strengthened to 6.4% compared to 5.1% in FY18. However, it was the result of its smaller segments that weighed down on what would have otherwise been another flawless report.

The United States business is attempting to fast-track its growth capabilities by expanding its distribution network, which currently exceeds 13,100 stores. While the noble attempt saw its EBITDA grow by 160.7%, the segment still posted a $44.0 million loss resulting from increased investment in distribution growth and brand awareness.

Furthermore, the UK segment is seeing poor growth and a2 has identified a lack of scale compared to significant growth potential in China and the US. The company will now exit the UK liquid milk operations and transfer any remaining UK infant nutrition customers to its China and other Asia segment.

Is it a buy at today’s prices?

I believe a2 is going through a transitory phase of focusing on its ANZ, China and US segments. The market may interpret an increase in marketing spend as a significant outlay in cash and impact margins, but it is an investment to support continued growth and market share.

One of the main determinants of where the a2 share price is headed in the short term is not its fundamentals, but the general market. On Monday, we witnessed the ASX 200 fall by more than 80 points or 1.3%. The US–China trade war escalation is rattling global markets and most stocks cannot escape the ebb and tide of the markets.

Foolish takeaway

The market is currently looking at a short-term bounce as US and China are ‘getting back to the table’ for trade negotiations. The a2 share price closed yesterday at $13.47 per share, and for the buy-and-hold investors that take a long-term view on a2 shares, I believe the current prices offer good value. For those that are more risk-averse, it may be better to wait for more certainty to come out of US–China trade talks.  

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Motley Fool contributor Lina Lim 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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