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Is the A2 Milk Company share price in the buy zone?

A2M share price
Source: Company presentation

It has been an oddly disappointing month for the A2 Milk Company Ltd (ASX: A2M) share price.

Since the start of May the infant formula and fresh milk company’s shares are down 4.5%.

This compares to a gain of 4.5% month to date by the benchmark S&P/ASX 200 Index (ASX: XJO).

Why is a2 Milk Company underperforming?

With no news out of the company this month, this decline appears to have been driven by profit taking after strong gains over the last few months.

After all, although a2 Milk Company’s shares have underperformed this month, they are smashing the market in 2020 with a 22% year to date gain.

Should you be selling your shares?

I wouldn’t be a seller of a2 Milk Company’s shares right now. In fact, I would be tempted to take advantage of this share price weakness to buy more shares.

This is because I think the company is one of the best growth shares on the local market and a great long term option.

Especially given the massive opportunity it has in the China market. At the end of the first half of FY 2020 its products were in 18,300 stores in the country and generated revenue of NZ$146.7 million over the six months. This gave it a modest China consumption market share of 6.6%.

Can it continue to grow its sales in China?

Based on its sales and distribution network at the end of the first half, a2 Milk Company was averaging approximately NZ$8,000 sales per store per six months.

We can extrapolate this to NZ$16,000 a year, which is the equivalent of just over NZ$300 per week per store or NZ$60 per working day.

I don’t think it is hard to imagine a2 Milk Company selling a greater volume of units per store in the China market over the coming years. Especially with the company investing heavily in marketing in the country.

Furthermore, while 18,300 stores is a large number, it is by no means the entire market. I expect further growth in its distribution in the coming years to also support its sales growth over the next decade.

Combined with its expanding fresh milk footprint and strong demand for infant formula from other channels, I believe the future is very bright for a2 Milk Company. In light of this, I would buy a2 Milk Company shares and hold onto them for the long term.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. 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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