A positive United States sales update from Bubs Australia Ltd (ASX: BUB) has put some spring back in the company's shares. Meanwhile, fellow infant formula listee A2 Milk Company Ltd (ASX: A2M) has seen its shares weaken to a new low for 2023.
Given the absence of business performance information from A2 Milk since April, investors might be trying to get a read on the industry from the recent Bubs announcement. After all, both companies are competing in international markets and have suffered leadership shakeups.
Could the US be an underappreciated market?
On Wednesday, Bubs revealed some reassuring numbers to shareholders regarding its operations in the United States. Namely, management now expects US net revenue for FY23 to land somewhere in the upper end of the previously guided $20 million to $22 million.
For context, this compares to $8.1 million in net revenue from the country in FY22. Furthermore, at the midpoint, it would equal approximately 24% of total revenue for the 12 months ending 31 December 2022, indicating the region's growing importance.
A2 Milk also operates in the United States. It launched there in 2015 with its milk products and supplies infant milk formula after receiving FDA approval amid the supply shortage. However, the focus of onlookers often gravitates toward A2 Milk's success in China.
In its heyday, the lucrative China daigou channel propelled A2 Milk shares to nearly $20 apiece. A price that is now almost inconceivable. The once-booming business has failed to return post-pandemic.
Instead, A2 Milk has concentrated on re-registering its label with China's State Administration for Market Regulation (SAMR). An endeavour that the company had success with earlier this month.
Preliminary estimates suggest the SAMR approval will generate $570 million in sales in FY23, compared to $430 million from daigou and cross-border e-commerce. However, Bubs' update may suggest that the US could be a significant growth engine.
In A2 Milk's half-year presentation, US revenue growth outpaced China's, albeit from a smaller base. Accounting for $52.4 million in revenue and increasing by 61.8%, the segment could help the company offset its declines across Australia and New Zealand.
Why it's not exactly a golden ticket for A2 Milk shares
While robust sales in the US for Bubs could suggest strong growth for A2 Milk, it may not be enough to impress investors.
As noted by my colleague, James Mickleboro, the Bubs update provides no insight into the profitability of these sales. Coincidentally, A2's US sales came with an earnings before interest, taxes, depreciation, and amortisation (EBITDA) loss of $16.4 million in the first half of FY23.
As it stands, A2 Milk shares trade at 30 times earnings. Given its more mature stature, shareholders will likely be looking for a re-acceleration of earnings growth before they're willing to pay much more of a premium.
