Is the a2 Milk (ASX:A2M) share price in the buy zone after last week’s 22% decline?

Is the A2 Milk Company Ltd (ASX:A2M) share price in the buy zone after crashing lower last week?

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The A2 Milk Company Ltd (ASX: A2M) share price was among the worst performers on the S&P/ASX 200 Index (ASX: XJO) last week.

The infant formula and fresh milk company’s shares sank a sizeable 22.4% lower over the five days.

Why did the a2 Milk Company share price crash lower?

Investors were selling the company’s shares on Friday after it downgraded its guidance for FY 2021.

The former market darling was forced to make the move after experiencing a more significant and protracted disruption in the daigou channel than it was previously expecting.

The company is now expecting to deliver revenue of NZ$670 million in the first half of FY 2021. This is a 7.5% to 13.5% reduction on its previous guidance range of NZ$725 million to NZ$775 million.

For the full year, management now expects revenue to be in the range of NZ$1.4 billion to NZ$1.55 billion. The mid point of this guidance range is down 18% to 22.3% from its previous guidance range of NZ$1.8 billion to NZ$1.9 billion.

It gets worse from here, unfortunately. The company has also reduced its margin expectations and is now forecasting an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 26% to 29%. This is down from 31% previously.

All in all, based on the mid points of both guidance ranges, this would represent EBITDA of NZ$405.6 million in FY 2021. This would be down a disappointing 26.2% from FY 2020’s EBITDA of $549.7 million.

Should you buy the dip?

While brokers are largely divided on whether a2 Milk shares are now in the buy zone, one broker that remains relatively upbeat is Morgans.

This morning the broker retained its add rating but cut its price target down to $12.20.

While the broker has reduced its earnings forecasts notably over the coming years, it still estimates that its shares are trading at just a little over 25x FY 2022 earnings. It appears to believe this is a fair price to pay, all things considered.

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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 and has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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