The A2 Milk Company Ltd (ASX: A2M) share price has tested its faithful investors with its recent movements.
A2 delivered a solid full-year result but upon closer inspection, the result was a slight earnings miss that also highlighted the withdrawal of its UK business segment, a significant loss in its US business and abnormally high expenditure on marketing. These factors combined may have been what triggered the 25% sell-off for the A2 Milk share price.
I do not question the quality of A2’s products, business model and its ability to deliver growth in the future but has the A2 Milk share price bottomed out and is there a buying opportunity?
Is the A2 share price a buy?
I believe that A2 is currently undergoing a transitory period to secure sustainable growth for many years to come. While its US business witnessed a significant $44m EBITDA loss, it saw revenues more than double and distribution expanding to over 13,100 stores. Clearly the focus here is to maximise the brands’ reach and distribution at the cost of its bottom-line. However, the objective here is to leverage the significant growth opportunity and build brand awareness in the short-term to reap the long term benefits of an established business in the US.
The company’s strongest performing regions, Australia, New Zealand and China continue to build momentum with record market share and distribution. The significant investment in marketing is to sustain its market-leading position, further expand market share and growth capabilities.
The A2 share price has also shown some early signs of consolidation around the $12 region. However, from a technical perspective, A2 is almost at the crossroads of the “death cross”. The death cross appears on a chart when a stock’s short-term moving average crosses below its long term moving average, typically, the 50-day and 200-day moving average cross over. Ideally, the share price needs to head higher in the coming days to avoid painting an even greater bearish picture.
I still firmly believe in A2’s fundamentals, however, substantial time is required to shrug off the negative sentiment of its full-year report. While the A2 share price is showing some signs of a “bottom”, it’s still caught on the wrong side of the moving averages. Currently prices may present a decent entry for long-term investors, however, short-sighted investors may want to wait for a better indication of where the share price is headed.
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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.