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Why this ASX infant formula share is surging 14% higher today

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It has been a very positive day of trade for the Clover Corporation Limited (ASX: CLV) share price.

This morning the infant formula ingredients producer’s shares stormed as much as 14% higher to $2.55.

Why did the Clover share price storm higher today?

The catalyst for today’s strong share price gain has been a trading update which revealed that it has recently experienced a surge in demand.

Since the release of its half year results at the end of March, Clover has benefited from strong demand from customers globally. Pleasingly, the company is anticipating a further increase in the fourth quarter from infant formula manufacturers.

This news won’t be surprising for followers of A2 Milk Company Ltd (ASX: A2M) and Bubs Australia Ltd (ASX: BUB). They have both revealed exceptionally strong growth during the pandemic.

Demand is above expectations.

Management notes that this forecast demand is above expectations and is primarily being driven by the market’s reaction to COVID-19. It believes consumers are buying additional infant formula products, which has depleted the pipeline fill into distribution warehouses and retail outlets. It feels this will also have been exacerbated by company and country isolation activities.

Another positive is that the company is benefiting from the depreciation of the Australian dollar. This is because the majority of its sales are transacted in U.S. dollars.

And while it does also make purchases in U.S. dollar, its inventory position at the end of the half year was particularly strong. This has reduced the need to purchase large volumes of oils and should lead to an increase in its gross margins.

Outlook.

Management has warned that it is too early to judge how long this heightened demand will be sustained. It also notes that several positive influences, such as COVID-19 demand and favourable currency movements, are likely to be one-off events.

Nevertheless, it expects a stronger than expected second half performance. This assumes forecast demand results in fulfilled orders and the global situation remains in the current state.

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James Mickleboro 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 and Clover Limited. 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.

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