The Bellamy’s Australia Ltd (ASX: BAL) share price may have been the best performer on the S&P/ASX 200 index last month with a 76% gain, but not all infant formula producers raced higher.
The A2 Milk Company Ltd (ASX: A2M) share price was out of form in September and recorded a decline of 10.3%.
Why did the a2 Milk Company share price come under pressure last month?
The a2 Milk Company share price has come under sustained pressure since the release of its full year results in August.
Although it posted an impressive 46.1% increase in EBITDA to NZ$413.6 million, this fell short of the market consensus estimate.
In addition to this, management’s guidance for lower margins in FY 2020 due to an increased marketing spend raised a few eyebrows. Investors appear concerned that its margins may now have peaked and its earnings growth could slow over the coming years.
Also weighing on its shares in September was a broker note out of Citi. According to the note, its analysts 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.
It made the move on the belief that the market is expecting too much from the company and that margin pressures could prevent it from achieving consensus estimates again.
Citi is concerned that the daigou channel is no longer going to be a reliable growth driver in the future and that the company will have to increase its investment to pursue further growth in the United States and China.
Should you buy the dip?
Although I think that Citi makes some very fair points, I still believe a2 Milk Company is capable of growing its earnings at a strong rate over the coming years thanks to increasing demand for infant formula in China, strong pricing power, and its growing fresh milk footprint in the United States.
So with its shares now trading at $12.16, which is below Citi’s price target, I feel now could be an opportune time to snap them up with a long-term view. I would choose a2 Milk Company ahead of both Bellamy’s and Bubs Australia Ltd (ASX: BUB) at this stage.
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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. The Motley Fool Australia has recommended 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.