Investor concerns about the impact of coronavirus on global growth has trashed the share price of many stocks, particularly those with direct exposure to China.
Despite the overall pessimism, the A2 Milk Company Ltd (ASX: A2M) share price has bucked the trend and actually made gains in the past 2 weeks. So, why is the A2 Milk share price so resilient?
Coronavirus and a2 Milk
Despite the doom and gloom, the coronavirus outbreak could actually have a positive impact on a2 Milk and the company's share price. As a public health concern, the conventional thesis is that coronavirus could impact foot traffic and hence the demand for goods and services.
However, some analysts believe that despite a declining demand in physical storefronts, a2 Milk could see a surge in online orders. The assumption is that as consumers are encouraged to stay at home, a2 Milk could see stronger online sales as households look to stockpile on products.
How has a2 Milk performed?
a2 Milk recently impressed the market when the infant formula company reported its results for the half year. The company's performance was highlighted by a 31.6% increase in total revenue to NZ$806.7 million. a2 Milk also saw a 20.5% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to NZ$263.2 million and 21.1% increase in net profit after tax to NZ$184.9 million.
The company's strong performance was fuelled by strong growth in infant formulas sales, which contributed NZ$659.2 million to total revenue. a2 Milk also saw strong growth in China, with sales of its Chinese labelled infant formula doubling to NZ$146.7 million and distribution growing to 18,300 stores.
a2 Milk anticipates continued strong revenue growth across its key regions and will support this forecast through increased marketing investments in China and the US.
The company also addressed the uncertainty on how the coronavirus could impact its supply chains and demand in China. Despite the uncertainty, management believes that a2 Milk's products will continue to be in strong demand among Chinese families, particularly through online and reseller channels. As a result, a2 Milk expects its EBITDA margin to remain in the 29% – 30% range for the full year.
Should you buy?
Not long ago, some analysts had a sell rating on a2 Milk based on the thesis that the company could not sustain its high margins in a more competitive market. a2 Milk's impressive performance has done enough to change the tune of many analysts. Recently, a note from UBS has a2 Milk rated as a buy with analysts lifting their price target on the infant formula company to $17.69.
In my opinion, any company that performs strongly in current market conditions is one to watch when volatility decreases. I think it would be prudent to keep a2 Milk on a watchlist and wait for the market volatility to subside before making an investment decision.
