Why is the A2 Milk (ASX:A2M) share price up 7% today?

The A2 Milk Company Ltd (ASX: A2M) share price is recovering strongly today from its 52-week low after receiving some love. Here’s the tea

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The A2 Milk Company Ltd (ASX: A2M) share price has been a pretty unrewarding performer over the past few months. Since topping out at more than $20 a share last August, the A2 Milk share price has spent the months since slowly going sour.

Hit by a seeming avalanche of earnings downgrades (4 so far), investors have been hitting the sell button on A2 Milk. Just this week, the company hit a new 52-week (And multi-year) low of $5.04 a share. That’s a good ~75% off of its high from last year.

Bad and worse

A2 was hit on multiple fronts. The coronavirus pandemic and the cessation of tourism around the world caused the daigou trade to come to a shuddering halt. Daigou is when customers buy products (in this case, A2 Milk products) in Australia, and then have them sent to a secondary market in China.

Due to import restrictions and the complex politics of the Chinese economy, daigou is often the only way some Chinese customers get to enjoy A2 products. Or at least, it was.

The pandemic caused this lucrative sales channel for A2 Milk to dry up. Although things have been loosening up slowly, the ongoing diplomatic spat between the Australian and Chinese governments has been hindering daigou resumption as well.

Long story short, A2 has had to downgrade its earnings expectations for FY2021 and beyond largely due to these concerns. It’s also flagged some inventory issues in its latest downgrade. Needless to say, investors have been less than impressed. As a result, A2 hit its lowest share price since 2017 this week.

But yesterday and today have seen a sharp reversal of this sentiment. A2 shares rose roughly 2% yesterday, and are up a robust 6.99% today (at the time of writing) to $5.58 a share.

So why have the tides of sentiment suddenly changed on this company?

Are A2 Milk shares a buy today?

Well, as my Fool colleague Brendon Lau reported this morning, A2 Milk has received some love from a broker. UBS has reportedly given A2 a ‘buy’ rating. That comes with a 12-month price target of NS$13.50. This translates roughly to $12.50 in AUD terms on today’s exchange rate.

UBS cites tightening inventory, as well as market share, for its optimism for A2. That’s probably exactly what investors wanted to hear on A2 after the week the company just had. This price target implies a future upside of more than 120%.

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Motley Fool contributor Sebastian Bowen owns shares of A2 Milk. The Motley Fool Australia 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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