Amidst all the current market turmoil, is the A2 Milk Company Ltd (ASX: A2M) share price a buying opportunity right now? Let's examine this in light of the company's recently released financial results.
Strong recent financials
a2 Milk recently impressed the market with is half year FY20 results. The company recorded a very strong 31.6% increase in total revenue to NZ$806.7 million. Earnings also managed to grow reasonably strongly despite the company's aggressive growth strategy. With this, a2 Milk saw a 20.5% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to NZ$263.2 million.
The company's impressive performance was driven by strong growth in infant formulas sales. a2 Milk is witnessing rapid growth in China, with sales of its China label infant formula doubling in the half and distribution growing to 18,300 stores. In addition, the company's Liquid Milk business continues to grow strongly in Australia and New Zealand.
On top of current demand which is stronger than expected, a2 Milk expects strong revenue growth in the second half across all of its markets, assisted by increased marketing investment in China and the USA.
However, the company acknowledges that there is uncertainty around the potential impact to supply chains and consumer demand in China resulting from the coronavirus outbreak. a2 Milk expects its EBITDA margin to remain in the 29% – 30% range for the full year.
Potential impact of sales on physical stores
I think that the concern about the impact of sales in physical stores due to precautionary action is being overplayed. Although sporting events and cinemas, for example, may be shut down for some time, I can't see supermarkets being impacted in a major way, especially in Australia and New Zealand.
In any case, even if there is a decline in demand in bricks and mortar stores, especially in more impacted markets such as China, A2 Milk could potentially even benefit from stronger online sales.
In fact, a2 Milk recently announced that it believes its products will continue to be in strong demand among Chinese families, particularly through online and reseller channels.
Are A2 Milk shares a buy?
I believe that a2 Milk's resilience to the current share market turmoil is illustrated by its recent share price performance. While the S&P/ASX 200 Index (INDEXASX: XJO) has fallen around 12% since the beginning of last week, A2 Milk shares have actually notched a 6% increase.
This resilience is supported by a very strong set of financial results, which suggests to me that a2 Milk is well-placed to carry out its aggressive growth strategy over the next few years.
Therefore, I think the A2 Milk share price offers good buying potential right now. However, with aggressive growth targets in place, the ride could be bumpy along the way.
