The A2 Milk Company Ltd (ASX: A2M) share price has come under pressure on Friday.
At the time of writing, the infant formula company's shares are down 3% to $5.38.
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Why is the A2 Milk share price falling?
Investors have been selling down the A2 Milk share price on Friday after the company was the subject of a bearish broker note out of Goldman Sachs.
According to the note, the broker has initiated coverage on the company with a sell rating and $5.80 price target.
Based on the current A2 Milk share price, this still implies potential upside of almost 8% from current levels despite the sell rating.
What did the broker say?
Goldman was pleased with A2 Milk's performance in FY 2022 and highlights the company's solid operational execution during the second half.
However, it has warned investors that it could be hard for the company to replicate this in FY 2023 due to a number of challenges. It explained:
Despite solid operational execution in 2H22, we believe this result will be challenging to replicate in FY23 given (1) overall market challenges in the context of a declining birth rate and a shift towards BCD (lower-tier) cities; (2) a step-up in competitive intensity in FY23 resulting in more intensive marketing; and (3) near-term risks around product transition (refreshed EL [English label] product, upcoming new Chinese National Standards ('GB') transition impacting CL [Chinese label]) and pending regulatory licenses.
In light of this, the broker is sitting below consensus estimates for earnings.
Our FY23/FY24/FY25 EPS estimates sit 6%/1%/3% below consensus (Bloomberg), which is predominately driven by higher marketing costs as well as caution on near-term sales growth. Our FY23E forecasts are broadly consistent with management guidance (7.9% revenue growth vs. high single-digit growth guided), although our EBITDA margin forecast is in line with FY22 (vs. guidance for marginally ahead) reflective of our view around higher marketing intensity.
The team at Bell Potter don't appear to agree with this view. Its analysts recently upgraded A2 Milk's shares to a buy rating with a $6.35 price target. Time will tell which broker makes the right call.
