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?

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A2 Baby formula shares

The A2聽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?聽

The a2 growth story so far聽

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

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鈥檚 own, Data source: a2 Milk full year results聽

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%.聽

Slump in infant nutrition sales聽

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鈥檚 revenue.聽

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.聽

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

Smaller revenue segments performing well聽

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.聽

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.聽

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.聽

Broker responses mixed聽

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.

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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.

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