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Why the A2 Milk share price is defying gravity in 2020

The A2 Milk Company Ltd (ASX: A2M) share price has defied the raging bears and is within 5% of its all-time highs. It has been a stellar performer in 2020 with year-to-date returns of approximately 15%, quite the contrary to the S&P/ASX 200 Index (ASX: XJO) and All Ordinaries (ASX: XAO) which have lost more than 20% in value since the start of the year.

Why is this the case and could there be an opportunity to buy a2 shares? 

Why the a2 Milk share price is so strong today

The a2 Milk share price has been climbing higher ever since its outlook update at its AGM late last year. This update reiterated continued strong revenue growth across key regions, supported by its significant investment in marketing and branding efforts.

Further gains to the bottom line were realised through an increase in earnings before interest, tax, depreciation and amortisation (EBITDA) margin thanks to favourable foreign exchange rates and cost of goods sold (COGS) reduction. a2 later delivered on its outlook in its 1H20 report which further reiterated that its strategy execution is gaining momentum.

There are a few sectors, few and far between, that have remained strong amidst the coronavirus pandemic. This includes a handful of healthcare names such as CSL Limited (ASX: CSL) and data centres such as Megaport Ltd (ASX: MP1) and NextDC Ltd (ASX: NXT). The underlying theme for these strong performers is fundamentally the same – essential goods and services that cannot be replaced or affected by pandemic containment policies. 

a2 Milk’s domestic infant nutrition and liquid milk segments will continue to remain strong as supermarkets and pharmacies remain open. 

a2 Milk’s international segments

China’s rigorous containment efforts have largely controlled the nation’s pandemic crisis. In fact, the country is slowly reopening and resuming business. Restrictions on movement and travel are being tentatively relaxed and stores including Apple and Starbucks are reopening nationwide. The narrative for China’s recovery is vital for a2’s continued success. a2 Milk has a growing footprint of more than 18,300 stores in China and is a leader in infant nutrition products on e-commerce sites such as JD.com and Tmall. 

In hindsight, a2 Milk’s departure from the UK market could be seen as a positive as not only did the region lack scale, but now struggles to contain and test for the coronavirus. 

a2 Milk continues to invest strongly in its US segment. While sales have continued to deliver triple-digit year-on-year growth, EBITDA is still negative due to increased investment in building brand awareness and distribution growth.  

Are a2 Milk shares a buy?

While the a2 growth story remains intact, I would personally not be buying its shares so close to all-time highs.

There is still significant uncertainty about how long these lockdowns will go for, and its implications for factors such as unemployment, economic growth and asset prices.

If however, the a2 Milk share price receives a hefty discount in the near future, I would consider it for a long-term investment.  

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Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. 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.

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