Why the A2 Milk (ASX:A2M) share price can outperform in 2021

Why the A2 Milk Company Ltd (ASX: A2M) share price could be a buy as the dairy share trades at a 17.5% discount to its all-time high.

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The A2 Milk Company Ltd (ASX: A2M) share price is something of an enigma. Shares in the Kiwi dairy group have rocketed an eye-watering 2,485% higher in the last 5 years.

In contrast, the S&P/ASX 200 Index (ASX: XJO) is down 11.9% for the year and up 14.0% in the last 5 years, excluding dividends.

So, the best time to buy a2 Milk shares was 5 years ago, but is the next best time today?

Why the a2 Milk share price can outperform next year

One of the big factors behind the company’s success has been an effective market dominance strategy. The a2 Milk brand is highly recognisable and has gradually grown earnings across a variety of products and markets.

In fact, I think the increasingly targeted branding and growing brand recognition is a key reason to like the a2 Milk share price right now.

That brand strength looks set to continue with the Kiwi dairy group eyeing an expansion into Canada. a2 will be taking on the likes of Canadian dairy giant Saputo Inc. but I think it is up for the challenge.

a2’s full-year earnings result showed just how robust the company’s earnings profile is, which is underpinning its international expansion. The company posted a 34% increase in net profit after tax to NZ$385.8 million as earnings surged.

I think investors can have comfort that a cash cow company in its core markets provides the security to look further abroad for growth. The a2 Milk share price could also benefit from inorganic growth as it continues to acquire larger stakes in companies like Synlait Milk Ltd (ASX: SM1).

One reason for the strong earnings has been a clearly defined supply chain. Supermarket sales have surged in 2020 as coronavirus panic buying took hold and a2 Milk as a downstream supplier has been a major beneficiary.

Some investors have been put off by a less than stellar outlook for FY21. However, I think the company’s FY20 return on equity of 34% shows that it can still be profitable for investors.

Foolish takeaway

The a2 Milk share price is down 17.5% from its all-time high which could mean now is a good time to buy in at a reasonable price.

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Motley Fool contributor Ken Hall 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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