Leading broker downgrades a2 Milk (ASX:A2M) shares

The A2 Milk Company Ltd (ASX:A2M) share price is dropping lower again after being downgraded by a leading broker…

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The A2 Milk Company Ltd (ASX: A2M) share price has come under pressure again on Wednesday and is dropping lower.

In afternoon trade, the infant formula and fresh milk company’s shares are down 1.5% to $10.42.

This latest decline means the a2 Milk share price is now down 48% from its 52-week high.

Why is the a2 Milk share price under pressure?

The a2 Milk share price has fallen heavily since the release of a disappointing update last month.

That update revealed that the company has experienced a significant decline in sales in the important daigou channel. So much so, it was forced to downgrade both its first half and full year guidance.

In respect to the latter, a2 Milk now expects revenue to be in the range of NZ$1.4 billion to NZ$1.55 billion in FY 2021. The mid point of this guidance range is down 18% to 22.3% from its previous guidance range and down 15% from FY 2020’s revenue of NZ$1.73 billion

And with the company’s margins suffering because of this, the company was forced to downgrade its earnings guidance.

It now expects an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 26% to 29% for FY 2021. This is down from 31% previously.

Based on the mid point of both guidance ranges, this represents EBITDA of NZ$405.6 million in FY 2021. This would be down a sizeable 26.2% from FY 2020’s EBITDA of $549.7 million.

That’s old news, why are its shares down today?

Given that this guidance downgrade happened last month, investors may be wondering why its shares are underperforming today.

Well, today’s decline appears to be attributable to a bullish broker changing its mind on the stock.

According to a note out of Goldman Sachs, its analysts have downgraded a2 Milk’s shares to a neutral rating and cut the price target on them to $12.09.

The broker has downgraded its estimates to reflect the update and suspects that its shares could underperform until its earnings momentum begins to recover.

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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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