Down 50% in 2021, is the A2 Milk share price a cheap buy?

A2 Milk shares have fallen heavily this year. But is it an opportunity?

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a small girl sits with her hand holding up the side of her face as she looks down in a downcast manner as she drinks a glass of milk through a straw.

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The A2 Milk Company Ltd (ASX: A2M) share price has fallen around 50% in 2021. Does that now make it a cheap opportunity?

Before the second half of 2020, A2 Milk was a market darling. When looking at the performance over the last five years, it still shows a rise of 171%.

The business has gone through a lot of pain. Even now, the business is still seeing difficulties as it tries to beat previous sales.

What’s the latest for the A2 Milk share price?

A2 Milk recently gave a trading update on 27 October 2021 for its performance so far in FY22.

English label infant formula sales in the first quarter were down compared to the first quarter of FY21, but were significantly up on the fourth quarter of FY21, which was “constrained” to reduce channel inventory levels.

A2 Milk said that its English label infant formula sales are expected to be down in the first half of FY22 but ahead of expectations.

Chinese label infant formula sales in the first quarter of FY22 have been constrained to reduce channel inventory levels further with sales “significantly down” on both the first and last quarters of FY21. Distributor offtake and retailer sales were up double digits year on year, but lower than expected. Chinese label infant formula sales are now expected to be “significantly down” in the first half of FY22.

Infant formula tier 1 inventory levels are now at the required levels for both English and Chinese label.

ANZ fresh milk volume was up year on year in the first quarter, but sales were flat because of foreign currency movements.

US liquid milk volumes were down, mainly due to a reduction in ranging by a club channel customer. Distribution cost pressures continue.

Mataura Valley Milk (MVM), with its advanced nutritional processing plant, has seen reduced demand and active steps are being taken to secure additional volume.

What do analysts think of the A2 Milk share price?

Opinions are mixed on the business. Citi currently rates the business as a buy and thinks it’s valued at 30x FY23’s estimated earnings.

UBS is very optimistic. This broker rates it as a buy, with a price target of $10.20 – that’s around 70% higher than today. It’s expecting a good recovery in the next few years. UBS puts the A2 Milk share price at 23x FY23’s estimated earnings.

The brokers at Macquarie Group Ltd (ASX: MQG) noted that A2 Milk has an ambition to grow sales to over NZ$2 billion and “improve margins”. The business is targeting an earnings before interest, tax, depreciation and amortisation (EBITDA) margin that’s “probably in the teens” in the medium-term due to market conditions, investment and innovation. The medium-to-long-term margin target is “low to mid 20s” subject to a recovery stronger than the market is expecting, English label channel growth and market share gains.

Macquarie thinks the margin outlook isn’t compelling and that there are still risks from here. Macquarie rates A2 Milk as a sell, with a price target of just $5.20.

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

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Motley Fool contributor Tristan Harrison 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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