The market may have pushed higher today, but the same cannot be said for the A2 Milk Company Ltd (ASX: A2M) share price.
In morning trade the infant formula and fresh milk company's shares have tumbled 2% lower to $12.37. This means they are now down over 28% from their 52-week high.
Why is the a2 Milk Company share price dropping lower today?
Investors have been selling the company's shares today after it was the subject of a reasonably bearish broker note.
According to a note out of Citi, its analysts have downgraded a2 Milk Company's shares to a sell rating from neutral and slashed the price target on them by almost 20% to $12.20.
The broker made the move on the belief that the market is expecting too much from the company this year and that margin pressures could prevent it from achieving consensus estimates.
This is partly because Citi believes that a2 Milk Company will need to increase its investment to pursue growth in the United States and China.
Another concern for Citi is the daigou channel. It believes that increasing competition means that this channel is no longer going to be a reliable growth driver in the future.
All in all, these concerns and its softer margins have led to the broker making a reduction to its earnings forecasts and ultimately its valuation.
What now?
Whilst I think that Citi makes some great points, I wouldn't be a seller of its shares just yet.
Especially with its shares down by around 28% from their 52-week high. This means they are trading at approximately 28x estimated forward earnings, which I feel is quite reasonable considering the company's current growth profile.
Overall, I would choose it ahead of Bellamy's Australia Ltd (ASX: BAL) and Bubs Australia Ltd (ASX: BUB).
