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Are ASX infant formula shares immune to the COVID-19 crisis?

Amid all the chaos that the COVID-19 pandemic has brought to the stock market, the A2 Milk Company Ltd (ASX: A2M) share price looks to be frozen in time. While the majority of stocks have had wild fluctuations in the past month, the a2Milk share price has actually risen more than 12% since the start of March (at the time of writing).

So, are stocks in the infant formula sector immune to the COVID-19 pandemic and should you buy?

Which infant formula producers should you watch?

Essential and nutritional goods have experienced a sharp increase in consumer demand amid the coronoavirus pandemic. Infant formula has not been spared in the panic buying that has plagued Australian supermarkets, with producers having to increase their scale of operations.

On the ASX, a2 Milk and Bubs Australia Ltd (ASX: BUB) would be the 2 most prominent infant formula producers that investors should watch.

How has a2 milk performed?

The a2 Milk share price has remained resilient in the coronavirus crisis. Despite its sales exposure to China, the company maintains that products will continue to be in high demand from local and Chinese consumer as they look to stockpile products. As a result, a2 Milk forecasted its earnings before interest, tax, depreciation and amortisation margin to remain in the 29–30% range for the full-year.

The company also boasts a strong balance sheet with an $800 million net cash position and has maintained supply links to China in order to maintain sales momentum. Recently, a2 Milk highlighted its resilience by announcing that the company will expand into the Canadian market. In addition, a2 Milk recently increased its share in Synlait Milk Limited (ASX: SM1), with a 19.84% interest in the company.

How has Bubs performed?

Bubs is the market leader in goat dairy, providing more than 65% of goat milk products in Australia. Although the Bubs share price has not been as resilient as a2 Milk, shares in the company have bounced more than 65% from their March low and are currently trading 30% lower since the start of 2020.

In mid-March, Bubs provided the ASX with an update on the company’s operations. Bubs informed investors that the company had doubled production at its Melbourne factory, increased capacity and hired new staff in response to a surge in demand for its products.

In the update, Bubs noted that 70% of its revenue for the most recent half year were from domestic sales. As a result, the company has been working with its retail partners to ensure that inventory can meet supply needs.

Is it too late to buy?

In my opinion, a case could be made to include infant formula producers in the defensive sector given their essential nature. Out of the producers mentioned, I would lean more toward investing in a2 Milk as a long-term buy. The company’s resilient performance in current market conditions and future growth prospects makes it a potential market leader.

I think a prudent strategy would be to keep these stocks on a watchlist and wait for share price consolidation before making an investment decision.

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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended BUBS AUST FPO. 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.