Is it a good time to buy A2 Milk (ASX:A2M) shares in August 2021?

Should you give the beaten up infant formula business a second chance

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It took a 75% tumble for the A2 Milk Company Ltd (ASX: A2M) share price to find a bottom.

After hitting an all-time high of $19.94 in late July 2020, the A2 Milk share price would fall sharply for almost 10-consecutive months, before finally bouncing off a 4-year low of $5.04.

Could August be the time to give the ex-market darling a second chance?

Is the A2 Milk share price a buy in August?

Unfortunately, the A2 Milk we all know and love might be a thing of the past.

Brokers are quite bearish about the near-term performance of the A2 Milk business.

On Tuesday, the Motley Fool reported that Credit Suisse has retained an underperform rating for the A2 Milk share price.

Its analysts think that demand for A2’s products will continue to be weak and likely dampen any earnings upside in the near term.

With the A2 Milk share price closing at $6.07 on Thursday, the brokers’ target price of $5.50 represents a downside of 9.3%.

China birth policy reforms

China has introduced a number of policies in recent years in an attempt to lift rapidly declining birth rates.

On 20 July, Bloomberg reported that Beijing would regulate the country’s after-school tutoring sector in an effort to cut the cost of having children.

While the Australian Financial Review (AFR) last week highlighted that “half-a-million new, low-cost childcare places will be added across 150 cities” to further encourage families to have more children.

On paper, China’s policies to lift birth rates sounds encouraging for A2’s infant formula business.

However, rising competition in China’s domestic market and consumer preferences could pose a risk to its overseas business.

The AFR quoted commentary from CSLA analyst Richard Barwick, who said that “a2 Milk’s China label business – which represents 45 per cent of its infant formula revenue – is most exposed to the risk of pricing control as it operates in the ultra-premium sector.”

“… it is clear that China’s government is favouring domestic infant formula brands after in 2019 setting a target for local players to make up 60 per cent of consumption within three years”, the AFR added.

The next catalyst for the A2 Milk share price

A2 Milk is expected to release its full year FY21 results on 26 August.

Unfortunately, A2’s track record of full year results has been far from pleasant.

The company’s FY19 and FY20 results witnessed a respective 13.19% and 6.53% decline on the day of the results.

Should you invest $1,000 in A2 Milk right now?

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Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. 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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