The A2 Milk Company Ltd (ASX: A2M) share price has been a strong performer over the last five years.
Since this time in 2015, the infant formula and fresh milk company's shares have rocketed from 54 cents to $17.48.
That's a whopping 32x return on investment for investors over the period. To put that into context, an investment of $10,000 in its shares in April 2015 would now be worth a staggering $320,000.
Unfortunately, I don't expect the same level of return will be achieved over the next five years. However, I do believe it is well-positioned to be a market beater again.
Here are four reasons why:
Strong demand for its products.
The catalyst for a2 Milk Company's stellar share price gain over the last five years has been strong demand for its products. This increasing demand has led to impressive sales growth and ultimately explosive earnings growth. The good news is that demand for its products continues to grow. This is particularly the case for its infant formula products in the massive China market. This is underpinned by the company's strong brand and its unique selling point. Positively, demand for infant formula continues to grow during the coronavirus pandemic. On Tuesday rival Bubs Australia Ltd (ASX: BUB) reported record third quarter sales.
Market share opportunities.
Although a2 Milk Company's sales in the China market have been growing at a rapid rate over the last few years, it still has a long runway for growth. At the end of the first half of FY 2020, a2 Milk Company's infant formula consumption value share increased to 6.6% in Key & A, and B, C, D cities in China. I believe further market share gains lie ahead thanks to increased marketing budget, strong brand, and its a2-only production differentiation.
Burgeoning cash balance.
Another reason to be positive on a2 Milk Company is its burgeoning cash balance. During the first half of FY 2020, the company generated operating cash flow of NZ$160.6 million. This led to it ending the period with a cash balance of NZ$618.4 million. While a small portion of this has been spent on increasing its stake in Synlait Milk Ltd (ASX: SM1), the vast majority of it still sits on its balance sheet. These funds could be used for earnings accretive acquisitions in the future to accelerate its growth. Alternatively, they could be returned to shareholders as part of a special dividend.
Value for money.
Despite its strong share price gain over the last five years, I still see value in a2 Milk Company's shares for long term investors. I estimate that its shares are currently changing hands at 29x FY 2021 earnings. While admittedly not cheap, I think this is a fair multiple to pay for a company which is positioned to grow its earnings at an above-average rate for a number of years to come.
