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The Bubs share price is up 20% in May, will it catch up to the A2 Milk share price?

The Bubs Australia Ltd (ASX: BUB) share price has outperformed the A2 Milk Company Ltd (ASX: A2M) in May by soaring more than 20%. 

Much of Bubs recent share price success can be attributed to its announcement of a new major supply agreement with Coles Group Ltd (ASX: COL) and other domestic retailers. This agreement means Bubs Organic Grass Fed Infant Formula will be on the shelves of more than 480 Coles supermarkets from June 2020, complementing existing products in its goat milk infant formula and organic toddler snack ranges. Other retailers to join Coles in selling Bubs products in-store include Baby Bunting Group Ltd (ASX: BBN) and Woolworths Group Ltd (ASX: WOW)

Bubs has also expanded its product range to include an organic cow milk formula, which will see it cater to a larger market – the cow’s milk segment accounts for over 90% of the Australian formula market. 

Bubs half-year result 

The Bubs share price showed it wasn’t impressed with the company’s half-year results released in February. The results may have missed expectations, or the timing of the report may have coincided with the initial outbreak of the coronavirus epidemic and consequent market sell-off. 

The company outlined a 39% increase in net revenue and a significant 24% increase in its gross margins. Its earnings before interest, tax, depreciation and amortisation loss slightly worsened, due to a 269% increase in marketing and promotional costs to support its domestic presence and building brand awareness in China. This is reminiscent of a2 Milk’s significant increase and investment in marketing in its FY19 full-year report. In a2 Milk’s 1H20 report, it commented that the increased levels of investment in marketing and capability development translated into accelerated growth in its China label business. 

A strong driver of its growth has been the sales of Bubs’ goat infant formula, which grew 77% on the prior corresponding period. Other revenue streams showed moderate growth with its organic baby food growing 23% and adult goat milk powder increasing 30%. Its fresh milk and yoghurt products looked to struggle the most, falling 49%. 

Foolish takeaway 

Bubs is securing the right partnerships and making worthwhile investments to strengthen its brand. However, given it is not yet a cash-generating business, I wouldn’t label it a ‘safe’ investment. But all things considered, in my opinion Bubs shares could make a good medium- to long-term buy.

Bubs may be an excellent business but if you are concerned about their negative cash flows, check out our free report for dirt cheap cash-generating businesses to buy today.

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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 BUBS AUST FPO. The Motley Fool Australia owns shares of A2 Milk, COLESGROUP DEF SET, and Woolworths Limited. 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.