The A2 Milk Company Ltd (ASX: A2M) share price has been among the worst performers on the S&P/ASX 200 Index (ASX: XJO) in 2021.
Since the start of the year, the fresh milk and infant formula company's shares are down a disappointing 49%.
In light of this, investors may be wondering if the a2 Milk share price is good value now.
Image source: Getty Images
How do you value the a2 Milk share price?
One way that investors might value the a2 Milk share price is with a price to earnings (PE) ratio.
The PE ratio measures a company's current share price against its earnings per share (EPS).
This method can be useful for valuing companies like a2 Milk in normal times, but things are far from normal for the company right now. The collapse in the daigou channel and excess supply have weighed heavily on its near term earnings. This means that its shares are trading on elevated earnings multiples currently.
For example, a recent note out of UBS reveals that it expects earnings per share of ~11 cents in FY 2021. Based on the current a2 Milk share price, this will mean a PE ratio of ~59x.
For a company that has downgraded its guidance four times in FY 2021, has an uncertain outlook, and is seeing its earnings go backwards, that would appear to be vastly overvalued. So why are investors happy to pay this to own its shares?
Forward PE
Investors appear to be looking beyond FY 2021 and to the future when valuing the a2 Milk share price.
Going back to the UBS note, its analysts expect the company's earnings to rebound in FY 2022 and have pencilled in EPS of ~24 cents.
Based on this, the company's shares are trading at a more reasonable 25x FY 2022 earnings. This compares to the ASX 200's PE ratio of 23x earnings according to Blackrock.
Though, it is worth remembering that this is a forecast and a2 Milk still needs to achieve it. Which, unfortunately as we have seen from its disastrous performance over the last 12 months, is far from guaranteed.
