The Motley Fool

Is it time to buy a2 Milk Company shares?

The A2 Milk Company Ltd (ASX: A2M) share price has continued its slide and is trading lower again on Thursday.

This latest decline means that the infant formula and fresh milk company’s shares have lost almost 20% of their value over the last 30 days.

Why is the a2 Milk Company share price down 20% in a month?

Investors have been selling the company’s shares since the release of its full year results last month. Although it delivered another strong profit result, the market was expecting even more from the fast-growing company.

In FY 2019 a2 Milk company posted a 46.1% increase in EBITDA to NZ$413.6 million, which missed the market consensus estimate by approximately 2.7%.

Furthermore, investors appear to be concerned by management guiding to lower margins in FY 2020 due to an increased marketing spend. This has sparked fears that its margins may now have peaked and its earnings growth could slow notably over the coming years.

Should you buy the dip?

Following this pullback in its share price, I estimate that the company’s shares are now changing hands at 29x FY 2020 earnings.

Whilst this is still a premium to the market average, I believe it is good value for a2 Milk Company due to its current growth profile.

Especially given recent data out of China which shows that the sales of the company’s products, and those of Bellamy’s Australia Ltd (ASX: BAL), are continuing to grow on ecommerce platforms.

According to a note out of Goldman Sachs, in August a2 Milk Company’s Tmall and Taobao sales grew 37% on the prior corresponding period.

It said: “Baby formula category grew by 16% yoy. A2M continued to be the clear outperformer with 37% yoy growth, while Nutrilon and Wyeth underperformed.”

“Within the IMF space, flagship stores in the CBEC channel seemed to grow faster in general. A2, Aptamil and Bellamy’s showed the strongest growth, while Nutrilon seemed to lag,” the broker added.

Overall, this appears to show that a2 Milk Company has had a solid start to the year and looks well-positioned to deliver another strong result if it can continue this positive momentum.

Goldman appears confident it will and has reiterated its conviction buy rating and NZ$17.50 (A$16.11) price target on its shares.

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Motley Fool contributor James Mickleboro 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.