Is the A2 Milk (ASX:A2M) share price going above $20?

The A2 Milk Company Ltd (ASX:A2M) share price could be heading above $20.00 according to one leading broker. Here’s why…

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A2 Baby formula shares

The A2 Milk Company Ltd (ASX: A2M) share price is trading slightly higher on Monday morning.

At the time of writing the infant formula and dairy company’s shares are up 0.5% to $16.47.

Can the a2 Milk share price go higher from here?

The a2 Milk share price could still go a lot higher from here according to one leading broker.

A note out of Goldman Sachs reveals that its analysts have retained their conviction buy rating but trimmed their price target slightly to $20.40.

This price target implies potential upside of almost 24% for the a2 Milk share price over the next 12 months.

Why is Goldman Sachs positive on the company?

Although the broker acknowledges recent changes in management and very heavy insider selling, it notes that the key drivers of company performance remain intact.

It explained: “ATM retains a promising earnings outlook (3YR EBITDA CAGR of 18%, FY20-23) despite the short term uncertainties around COVID stockpiling and customer disruption.”

A key driver of this growth is of course expected to be its China business. Especially given its expanding footprint in the country. Goldman estimates that it is now inside 23,800 mother and baby (MBS) stores in the country, up from 19,000 at the end of FY 2020.

Its analysts commented: “Despite the cross border e-commerce channel remaining strong, we forecast the MBS channel to deliver stronger medium term growth as door units are increased.”

As a result of this, Goldman Sachs is forecasting earnings before interest, tax, depreciation and amortisation (EBITDA) of NZ$662 million in FY 2021. This will be a 19.9% increase on FY 2020’s EBITDA of NZ$552 million.

On the bottom line, it has penciled in earnings per share of NZ$0.63, up 20% from NZ$0.524 a year earlier.

Does this make the a2 Milk share price good value?

In light of this growth and the recent pullback in the a2 Milk share price, Goldman thinks the company is trading at a very attractive level.

It explained: “ATM is trading at an FY21 P/E of 17.9X, a 6% premium to the market compared to its five-year average of a 50% premium.”

While I do have concerns that its first half performance could underwhelm if sales were brought forward during the pandemic because of pantry stocking, I would still invest if you plan to buy and hold its shares for the long term. 

Given its positive long term growth outlook and attractive valuation, I believe the a2 Milk share price could be a market beater over the coming years.

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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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