The A2 Milk Company Ltd (ASX: A2M) share price has been incredibly resilient during the coronavirus pandemic.
On Friday the infant formula and fresh milk company's shares finished the week at $16.62. This is just 4% lower than its 52-week high of $17.30.
It also means that the a2 Milk Company share price is up almost 19% since the start of the year. This compares to a 24% decline by the benchmark S&P/ASX 200 Index (ASX: XJO) in 2020.
Why is the a2 Milk Company share price outperforming?
Investors have been buying a2 Milk Company's shares in 2020 for a couple of reasons.
The first is that, like Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW), a2 Milk Company is being seen as a company that is benefiting from the coronavirus pandemic. This is due to the panic buying of its infant formula products by daigou shoppers and consumers in mainland China.
In February the company commented:
"Given the essential nature of our products for many Chinese families, demand is strong, particularly through online and reseller channels, with revenue for the first two months of 2H20 above expectations. However, this is a dynamic situation and at this stage we are unable to quantify the impact, either positively or negatively, for the full year."
This appears to have left a2 Milk Company well-placed to build on its impressive performance during the first half of FY 2020, which was another reason why investors were buying its shares.
In the first half a2 Milk Company reported total revenue growth of 31.6% to $806.7 million and a 20.5% lift in EBITDA to $263.2 million. This was ahead of both the market's expectations and management's guidance.
Once again, the key driver of its growth was its infant nutrition sales. The company delivered a 33.1% lift in total infant nutrition sales to NZ$659.2 million for the half. This was thanks largely to strong growth in China label infant nutrition. Its sales doubled to NZ$146.7 million after its distribution expanded to 18,300 stores.
Is it too late to invest?
I don't think it is too late to buy a2 Milk Company's shares. Despite their outperformance this year, I estimate that they are changing hands at a reasonable 31x full year earnings.
Whilst this is still a premium to the market average, I think it is a fair price to pay for a company that is capable of growing its earnings at a solid rate for a good number of years to come.
This is largely down to its massive opportunity in the China market. Despite its success in the country, the company still only has a relatively small market share of 6.6%. I believe this provides it with a long runway for growth and expect further market share gains thanks to the quality of its product, its unique selling point, and strong brand.
Another positive is the company's cash balance. At the end of the first half a2 Milk Company had a cash balance of NZ$618.4 million. And whilst it has spent a small portion of this on increasing its stake in dairy processor Synlait Milk Ltd (ASX: SM1), it still has the majority of this balance leftover. This gives it the option to accelerate its growth through earnings accretive acquisitions in the future.
