Can the beaten down A2 Milk (ASX:A2M) share price get back to $10?

Could 2022 be the year for A2 Milk?

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Key points

  • A2 Milk shares are in a 51% drawdown from January 2020 highs of circa $10 per share.
  • The visibility on the future of A2 Milk’s share price future remains unclear.
  • The team at Bell Potter are constructive on A2 Milk and rate it a buy right now

Shares in A2 Milk Company Ltd (ASX: A2M) have struggled this week and are down 2.86% at the time of writing.

It’s been a challenging year for A2 Milk both operationally and on the chart this past year. Shareholders have witnessed their holdings peak at a 52-week high of $10.79 in January last year, before free diving off the cliff face to bottom at $5 in May.

After a lumpy revival period throughout the remainder of 2021, where shares attempted a snapback rally on a few occasions, the A2 Milk share price now trades back at these levels, having closed the session at $5.24 on Thursday.

As shown on the chart below, that’s a 51% drawdown from that January 2020 high, meaning the A2 Milk share price now needs to spike over 100% in order to break even at that point once more. Can it be done? Let’s take a look.

TradingView Chart

Can A2 Milk thrust towards former highs?

Underpinning the large company’s lacklustre performance on the chart is its operational performance throughout FY21.

For instance, in its FY21 report, the company recognised a 30% decrease in revenue to NZ$1.2 billion whereas net profit after tax (NPAT) decreased by almost 80%.

Underpinning the weak result was a shift in the demand dynamics out of A2’s largest export customer, China. Demand from China came in softer last year meaning the company had to write down its inventory values.

Now there are reports that Canadian dairy processing giant Saputo could be set to embark on the acquisition scale, as conveyed by Motley Fool at the time.

Doing so could provide the opportunity to unlock long-term value and trend upwards to its pre-COVID earnings profile, where it recognised NZ$1.73 billion in revenue in FY20.

Hence the visibility on the future of A2 Milk’s share price future remains unclear. This point was even hammered in by management itself most recently, stating that because of “these uncertainties and the range of potential outcomes, it is very difficult to define future state targets and when they will be achieved – the path is also unlikely to be linear”.

The team at Bell Potter are constructive on A2 Milk and rate it a buy right now amid the strengthening fundamentals and a positive earnings outlook over the coming 5 years.

For example, it reckons that A2 Milk can focus can double EPS by FY26 should it successfully convert on its China offline expansion strategy. As such, the broker values the company at $7.70.

With that in mind, Bell Potter doesn’t believe the market is currently “reflecting this potential” within A2 Milk’s growth and normalisation outlook.

In fact, when checking the consensus of analyst estimates provided by Bloomberg Intelligence, the price target on A2 Milk shares is $6.50 and sentiment is normally distributed across each of buy, hold and sell recommendations.

Importantly, no brokers value A2 Milk close to its previous highs of $10. The highest price target from this group is $7.70 out of Bell Potters’ camp, for instance, whereas Macquarie rate it as a sell at $5.20.

A2 Milk share price snapshot

A2 Milk investors are swimming in a sea of red, with the share price down 52% in the last 12 months and 7% already this year to date.

The selling pressure has spilled over into this week and shares are down 5% this week.

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

Before you consider A2 Milk Company, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and A2 Milk Company wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of January 13th 2022

Motley Fool contributor Zach Bristow 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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