What next for the a2 Milk (ASX:A2M) share price?

Could you call the A2 Milk Company Ltd (ASX: A2M) share price a cheap growth stock after it slumped to a 2 year low in December?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The A2 Milk Company Ltd (ASX: A2M) share price has slumped to a two-year low of $11.59 (as of Tuesday's close). Its shares have shed more than 40% in value since its August record all-time high of $20.00. With the market darling falling heavily in recent months, could a2 Milk finally be called a cheap growth stock? 

The a2 growth story so far 

A2's market leading returns, for the most part, are attributed to its phenomenal growth in earnings. 

  FY17 FY18 FY19 FY20
Revenue $352.5 $549.2 $922.4 $1,731
Revenue growth 56% 68% 41% 33%
Net profit after tax (NPAT) $90.6 $195.7 $287.7 $385.8
NPAT growth 198% 116% 47% 34%

Table: author's own, Data source: a2 Milk full year results 

The company's most recent earnings update, however, points to its first ever negative year-on-year growth in earnings. It forecasts group revenue for FY21 to be in the range of $1.40 billion to $1.55 billion, which represents a decline of 10.5% to 19%. 

Slump in infant nutrition sales 

Infant nutrition sales, particularly through its daigou and cross border ecommerce (CBEC) channels, has been the centrepiece for the a2 growth story so far. In FY20, infant nutrition sales accounted for 61.5% of the group's revenue. 

In its first half FY21 and FY21 guidance update, the company flagged that the recent sales performance in the daigou channel has not been as strong as previously expected, and a2 Milk now considers the recovery throughout the remainder of the fiscal year to be slower.

It expects that reduced travel between Australia and China through the remainder of FY21 will continue to negatively impact the seller channel, with grim prospects of a return of a significant number of international students and tourists to Australia during the period. 

As a result, the company forecasts both the daigou and CBEC channels for the remainder of FY21 to be materially lower. 

Smaller revenue segments performing well 

Notwithstanding the significant disruption to its channels noted above, the company advised its recent research again highlighted positive trends in China in lead indicators such as brand awareness and intention to purchase. 

Its China label Mother & Baby Stores (MBS) has remained very strong with an anticipated revenue growth in the first half of above 40% on the prior corresponding period. To add some perspective, its China label achieved $337.2 million of the group's $1.73 billion revenue in FY20. 

Furthermore, it also noted that its liquid milk businesses in Australia and the US have performed well through the first half, with both businesses posting strong first half FY21 growth as compared to the first half of FY20. 

Broker responses mixed 

Big brokers were surprised with the magnitude of a2's earnings downgrade and were reserved with their new price targets. On 21 December, Citi retained its sell rating with a price target of $9.50, while Morgan Stanley lowered its price target from $12.40 to $11.00.

Motley Fool contributor Lina Lim 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.

More on ⏸️ Shares to Watch

asx share price rebound represented by wooden blocks spelling rebound with coins on top
⏸️ Shares to Watch

Could the Zip (ASX:Z1P) share price make a comeback in 2021? 

The Zip (ASX: Z1P) share price struggled to outperform in the second half of 2020. Could 2021 be a better…

Read more »

⏸️ Shares to Watch

What's in store for the Afterpay (ASX:APT) share price in 2021? 

The Afterpay (ASX: APT) share price has surged more than 275% in 2020. Here's a little of what investors can…

Read more »

wondering about asx share price represented by man surrounded by question marks
⏸️ Shares to Watch

Is the Zip (ASX:Z1P) share price a buy yet?

The Zip Co Ltd (ASX: Z1P) share price continues to underperform despite an exciting capital raising. Could it finally be…

Read more »

questioning whether asx share price is a buy represented by man in red shirt scratching his head
⏸️ Shares to Watch

Should you buy the Appen (ASX:APX) share price dip?

Could the Appen Ltd (ASX: APX) share price be a buying opportunity after its recent selloff? We take a look…

Read more »

Share Fallers

Why this broker thinks it's time to buy Qantas (ASX:QAN) shares

As state borders re-open to domestic tourism, this broker thinks it could be time to start buying Qantas Airways Limited…

Read more »

wondering about asx share price represented by man surrounded by question marks
⏸️ Shares to Watch

Could this be why the Zip (ASX:Z1P) share price is underperforming?

Could this be why the Zip Co Ltd (ASX: Z1P) share price is down 50% from its August highs and…

Read more »

Hands grabbing for high rung on a ladder pointing to the sky
⏸️ Shares to Watch

The Rhipe (ASX:RHP) share price has jumped 8% today. Here's why.

The Rhipe Ltd (ASX: RHP) share price has popped 8.59% after announcing its first quarter FY21 update. Here's the run…

Read more »

⏸️ Shares to Watch

Broker updates are mixed on these 6 high profile ASX 200 shares

It's a mixed bag of broker updates this week across a range of high profile ASX 200 shares including Afterpay…

Read more »