Is the A2 Milk Company Ltd (ASX: A2M) share price a buy?
It’s been a tough few months for A2 Milk shareholders. Since the start of August 2019 the share price has fallen by around 27%.
When you look at some of the other growth shares on the ASX it isn’t the same story of decline. The Xero Limited (ASX: XRO) share price is up around 10% since the beginning of August and the WiseTech Global Ltd (ASX: WTC) share price is up 4.6%.
It’s a little more confusing when you consider that both the US and Australia have cut their interest rates in recent months, which theoretically should push up asset prices a little.
A2 Milk is suffering from some stock-specific problems. The company warned that its earnings before interest, tax, depreciation and amortisation (EBITDA) margin would be lower in this financial year because it will spend more on advertising.
There’s two ways to look at that. One argument would be that A2 Milk is having to increase its costs to maintain a similar growth trajectory, which would be a sign of decline. Or you could say that A2 Milk are trying to maximise the huge opportunities of the US and China markets.
The growth of A2 Milk over the past five years shows that management seem to know what they’re doing and have the skills to capitalise with their target markets.
Many of the world’s best investors say that some of their biggest mistakes is when they don’t buy more shares of great businesses even if that share price has already done very well.
The only potential worry about A2 Milk for me is China. We’ve seen the big impact that Chinese regulations and disruptions can have on infant formula players like Bellamy’s Australia Ltd (ASX: BAL).
There’s no suggestion that A2 Milk faces similar issues, but it makes me a little wary.
A2 Milk could be the best priced growth share at the moment. It’s priced at ‘only’ 25x FY21’s estimated earnings. This looks like a good price to me when you think about the long growth runway that A2 Milk has. There are plenty of countries that A2 Milk isn’t sold in, particularly in Europe.
But A2 Milk isn’t the only great option for growth, these top-class shares could all beat the market in the short and long-term.
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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of WiseTech Global and Xero. 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.