Is the a2 Milk (ASX:A2M) share price a bargain or value trap?

The A2 Milk Company Ltd (ASX:A2M) share price hit a multi-year low on Tuesday. Does this make it a bargain buy or value trap?

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It has been another day in the red for the A2 Milk Company Ltd (ASX: A2M) share price on Tuesday. At one stage today, the fresh milk and infant formula company’s shares fell 4% to a multi-year low of $5.12.

When the a2 Milk share price hit that level, it meant it was down almost 75% from its 52-week high.

Where next for the a2 Milk share price?

Opinion is largely divided on whether the a2 Milk share price is a bargain buy or a value trap following its sizeable decline.

Though, one thing that is for sure, is that it may not be as cheap as you think despite shedding 75% of its value.

For example, analysts at Credit Suisse are forecasting the company reporting earnings per share of ~11.2 cents in FY 2021 and then ~17.7 cents in FY 2022. This means the a2 Milk share price is trading at 46x estimated FY 2021 earnings and 29x estimated FY 2022.

As a comparison, the Kogan.com Ltd (ASX: KGN) share price, which has also fallen heavily, is trading at 24x estimated FY 2021 earnings and 22x estimated FY 2022 earnings, according to Credit Suisse’s forecasts.

Based on the above, this would arguably make Kogan the more attractive option for investors. It is no wonder then that Credit Suisse has a sell rating and $5.00 price target on a2 Milk’s shares and a buy rating and $17.93 price target on Kogan’s shares.

What about other brokers?

It is worth noting that Credit Suisse is one of the more bearish brokers when it comes to a2 Milk. This is due to its concerns that Chinese consumers are shifting towards local brands and the daigou channel may never return to what it used to be.

But not everyone is as bearish. Analysts at Bell Potter, for example, have a buy rating and $8.50 price target on the company’s shares. While this is still a long way from its high, based on the current a2 Milk share price, this still implies potential upside of approximately 65% over the next 12 months.

Bell Potter is anticipating a stronger recovery in FY 2022 and is forecasting earnings per share of 28.9 cents. If this is accurate, the company’s shares are currently trading at a much more reasonable 18x estimated FY 2022 earnings.

However, given the incredibly high level of uncertainty it is facing, only time will tell which broker made the right call.

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd. The Motley Fool Australia has recommended A2 Milk and Kogan.com ltd. 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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