In these uncertain economic conditions, it’s fascinating to see which companies have flourished and which have failed. The tourism sector has understandably suffered after governments across the world implemented strict travel bans. Shares of companies like Flight Centre Travel Group Ltd (ASX: FLT) and Webjet Limited (ASX: WEB) are still trading at a fraction of their pre-pandemic levels.
But the COVID-19 crisis has also produced some unlikely market darlings. The share prices of companies like Australian online retailer Kogan.com Ltd (ASX: KGN) and meal kit delivery service Marley Spoon AG (ASX: MMM) have skyrocketed after demand for their offerings surged during lockdown.
Another niche sector of the economy that has held up strongly throughout the pandemic has been infant formula. Two companies operating in this sector that have seen spikes in demand are A2 Milk Company Ltd (ASX: A2M) and Bubs Australia Ltd (ASX: BUB). The solid performance of these companies throughout the coronavirus crisis have resulted in the A2 Milk and Bubs share prices showing remarkable resilience during this volatile period.
The A2 Milk Company share price
Surprisingly, the A2 Milk Company share price has taken the whole coronavirus crisis firmly in its stride. Despite exhibiting increased volatility throughout February and March, the share price has marched steadily upwards. It eventually peaked with a 52-week high of $19.23 on 20 April. And while it has edged lower in recent weeks, the A2 share price is currently trading at $17.83, as at the time of writing. This still puts it well within striking distance of that high.
In a market update released in late April, A2 Milk stated that revenue for the March quarter had exceeded expectations. This was driven by changes in consumer purchasing behaviour in response to the developing coronavirus crisis. Panic buying saw large numbers of consumers stocking their pantry with basic staples like long-life dairy products and infant formula.
While acknowledging that the future remained incredibly uncertain, New Zealand-based A2 Milk upgraded its guidance for FY20 EBITDA growth to be in the range of 31% to 32%. It expected full year revenue to be between NZD$1.7 billion and NZD$1.75 billion. This represents an increase of between 30% and 34% over the previous year.
The Bubs Australia share price
While the share price of ASX organic infant formula company Bubs hasn’t performed quite as well as that of A2 Milk, it has still managed to keep long-term shareholders happy throughout the health crisis. After falling to a low of just 40 cents in mid-March, the Bubs share price has rebounded strongly, climbing all the way back up to $1.04 at the time of writing.
Revenues for the March quarter were the highest on record at $19.7 million. This is an increase of 36% over the previous quarter. Growth was driven by a surge in demand for its infant formula, which made up 58% of gross sales for the quarter. Sales volumes were up across all regions, particularly in China and Vietnam.
The company has been resilient throughout the pandemic in part due to its vertically integrated supply chain. In December 2017, Bubs acquired goat milk powder producer NuLac Foods, which operates a farm in Victoria’s Gippsland region. NuLac also operates a processing plant in the Melbourne suburb of Keysborough. This means Bubs has exclusive supply of the key ingredient in its goat milk infant formula. It also means the company is insured against supply-side disruptions caused by COVID-19 lockdowns and travel restrictions.
Should you invest?
The key issue for companies like Bubs, A2 Milk and even Marley Spoon, is whether this increase in short-term demand will persist over the longer term. Panic buying and lockdown restrictions have been unprecedented but are now starting to ease. This means there is the potential for sales to slump in subsequent quarters as things gradually return to ‘normal’.
A2 Milk has long been a market darling. But what I believe the crisis has really revealed is the strength of Bubs’ vertically integrated supply chain. Bubs has remained robust throughout the crisis and has ensured that its production can meet demand. Plus, the company also recently announced a new local supply agreement with Coles supermarkets. This means it could potentially emerge from this crisis in an even stronger position. I would definitely be putting the Bubs share price on my watch list heading into results season.
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Motley Fool contributor Rhys Brock owns shares of BUBS AUST FPO and Kogan.com ltd. The Motley Fool Australia owns shares of and has recommended BUBS AUST FPO, Kogan.com ltd, and Webjet Ltd. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. 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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