There was a recent video circulating around the internet of shoppers in an Australian store, quarrelling over baby formula tins. The video speaks volumes about the demand for infant formula, which has forced supermarkets to impose buying limits on the products.
Baby formula is an essential good and has experienced a sharp increase in demand as a result of the coronavirus pandemic. Despite the pandemic wreaking havoc on financial markets, the ASX baby formula shares have remained relatively stable amid the turmoil. With the outlook for global growth looking gloomy, investors have turned their attention to stocks and companies that can prosper in challenging markets.
So, are infant formula stocks recession proof and should you add them to your portfolio? Here's a closer look at 2 of the most prominent baby formula stocks on the ASX and how they have performed during the recent bear market.
A2 Milk Company Ltd (ASX: A2M)
The a2 Milk share price has snubbed the market turmoil caused by the coronavirus pandemic and is actually trading at all-time highs. Although the company relies heavily on Chinese demand for sales growth, a2 Milk has reassured investors that growth margins remain on track.
With local and international consumers looking to stockpile products, a2 Milk forecasts its earnings before interest, tax, depreciation and amortisation margin to remain in the 29–30% range for the full-year.
The company has maintained supply links with China and last month it showcased its resilience by announcing intentions for further expansion into the Canadian market. In addition, a2 Milk recently increased its share in Synlait Milk Ltd (ASX: SM1), with a 19.84% interest in the company.
Bubs Australia Ltd (ASX: BUB)
Bubs is the market leader in goat dairy, providing more than 65% of goat milk products in Australia. The company's share price has not been as resilient as that of a2 Milk, however, it has shared the same narrative of booming international demand. Despite being sold down initially, the Bubs share price has managed to rally more than 108% from its March low.
Last month Bubs informed the market that the company was doubling its production capacity in order to meet a surge in demand for its products. The increase in demand was reflected recently when Bubs released its quarterly activity report for FY20. For the quarter, Bubs reported a 67% increase in sales in comparison to the prior corresponding period and a 33% increase from the quarter prior. In addition, the company saw positive operating cash flow for the quarter of $2.3 million.
Foolish takeaway
Personally, I wouldn't say that baby formula stocks are recession proof, based on their heavy reliance on developing growth markets, China in particular. Although a weaker Australian dollar makes products more competitive a slowdown or recession in China would leave a huge hole in the demand for baby formula products.
In my opinion, baby formula stocks have the potential to become market leaders. Although they may not be fully recession proof, they do offer investors resilient and stable growth.
