Can A2 Milk shares benefit from the US baby formula shortage?

The United States has seen an unprecedented shortage of baby formula in recent months.

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Key points

  • A2 milk shares get upgraded by broker on US baby formula scarcity 
  • A major US producer was forced to recall its products in February following a bacteria scare 
  • The infant formula market in the US is worth US$4.8 billion annually 

If you own A2 Milk Company Ltd (ASX: A2M) shares, you may be wondering if the infant formula company could garner some extra sales from the current supply crisis playing out in the United States.

While A2 Milk has yet to step in to help fill the void, some other international companies, like European based Danone, have tripled their exports to the States in recent months,

Why is the US running short of baby formula?

The US produces almost all of its own baby formula for domestic consumption.

But the market is dominated by a few top players. That’s led to some distressing shortages over the past few months, which has investors wondering if A2 Milk shares could receive some helpful tailwinds.

The formula crisis commenced on 17 February, when one of the top formula producers in the country, Abbott Laboratories, shuttered a manufacturing plant after discovering bacteria on site. Abbott then recalled many of its top formulas, sparking a mass shortage of infant formula.

And Abbott’s woes have opened up a window of opportunity for the international competition after the US Food and Drug Administration increased formula imports to stem the shortage.

This is big business in the world’s number one economy, estimated to be worth US$4.8 billion annually.

According to Barclays analyst Warren Ackerman (courtesy of Reuters), “Abbott looks to have lost around 2000 basis points of share, going from 40% share to 20%,” of the US infant formula market.

Can A2 Milk shares benefit?

A2 Milk shareholders hoping to see the Aussie company swoop in for some of that lucrative market share could be disappointed, according to Infant Nutrition Council of Australia and New Zealand CEO Jan Carey.

Carey thinks the window of opportunity for international companies will be “a very short-term opportunity”.

According to Carey (quoted by RNZ News):

It’s incredibly difficult to get products into the market in the United States. The regulation is very hard, there’s a number of hoops that you’ve got to jump through, it’s very difficult.

And it shows. Because it’s so difficult, there aren’t very many infant formula companies in the United States, and so when a supply issue happens, they’re really in a lot of trouble.

If A2 Milk wants part of the action, the company will have to move fast.

“I’ve been in touch with my counterparts in the US and this is a short-term crisis, that should be over in the next six-to-eight weeks,” Carey added.

But not everyone agrees.

A2 Milk shares get broker upgrade on US shortage

A2 Milk shares are up 5.1% in morning trade to $4.50 per share.

With the US shortage in mind the company received an upgrade from Citi to Neutral.

Citi didn’t dismiss lingering downside risks to the infant formula company’s business.

However, the broker said (courtesy of The Australian), “The potential development of a credible US IMF strategy to respond to the current shortage may lead to a re-rating. Further, after underperforming the ASX 200 by about 12% since beginning of April, A2’s share price is now broadly in line with our new target price of $4.64.”

Citi’s target price is some 3% above where A2 Milk shares are currently trading.

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 Scott Phillips.

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