One of the most successful investors in history is Berkshire Hathaway’s Warren Buffett.
At the last count the legendary investor had amassed a fortune of US$77.4 billion according to Forbes.
In order to get there, the “Oracle of Omaha” has invested wisely and with a long-term view.
While amassing a similar fortune may be difficult, I believe regular investors can still create significant wealth by following his investing principles.
Four key principles that Buffett follows are listed below. I’ve used these principles to see if A2 Milk Company Ltd (ASX: A2M) would be a share that he would invest in. Here’s what I found:
Buffett invests in companies that he can understand.
The a2 Milk Company is a premium branded fresh milk and infant nutrition company that is uniquely focused on products containing the a2 beta-casein protein type. Dairy products with just the a2 protein are believed to be easier to consume for those who experience challenges drinking conventional cows’ milk, which includes both a1 and a2 proteins. I think it is a very simple business to understand with clear drivers of demand. As a result, I think it gets a tick for this principle.
Buffett looks for companies with a durable competitive advantage.
Although the popularity of a2 Milk Company’s products has led to other dairy companies launching their own a2-only products, this hasn’t diminished demand from consumers. In fact, many believe that this has only strengthened its brand in the eyes of Chinese consumers. This is because the launch of a2 only products by big multinationals reinforces the a2 Milk Company’s premium brand in this key market. In light of this, I think its competitive advantage is here to stay.
Management must be talented and have integrity.
There has been a bit of upheaval at the company over the last 12 months, with former CEO Jayne Hrdlicka believed to have been forced out in December. Ms Hrdlicka “agreed to step down” from her role with immediate effect and was replaced with former CEO, Geoffrey Babidge. He replaced Hrdlicka on an interim basis while the board searches globally for a permanent replacement. While we don’t know who the next leader of a2 Milk Company will be, I’m confident it has the power to attract a high calibre executive to take it to the next level.
Don’t overpay for shares.
At present a2 Milk Company’s shares are changing hands at 34x estimated FY 2021. While this is not conventionally cheap, I feel its outlook justifies this premium. I believe a2 Milk Company has the potential to grow its earnings at an above-average rate for a number of years to come. This is thanks to the growing popularity of its infant formula in China, its modest market share in the lucrative market, and its expanding fresh milk footprint. Another positive is its hefty cash balance. I suspect this could be deployed for earnings accretive acquisitions in the near future.
While Buffett may prefer to buy a2 Milk Company at a cheaper price, overall I think it is a share that he would approve of. I would class it as a strong buy for investors that are interested in making a long term investment.
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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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