The A2 Milk Company Ltd (ASX: A2M) share price has been hit hard in 2023 to date. It's down 24%, as shown in the chart below.
In this article, I'm going to look at whether it could do well in August.
We're coming into ASX reporting season so I think what the company reports in its FY23 result — and what it says about FY24 — could be key.
Let's have a little look at what the business might report.
Profit estimates
Using the projected figures on Commsec, A2 Milk could generate earnings per share (EPS) of 18.6 cents in FY23 and 22.9 cents in FY24.
That would put the A2 Milk share price at 27x FY23's estimated earnings and 22x FY24's estimated earnings.
Going into ASX reporting season, analysts are mixed on the company after the recent declines in its valuation.
According to the collation of analyst opinions that Commsec looks at, there are currently five buy ratings, two sell ratings, and five holds.
According to Commsec, Goldman Sachs has estimated that in FY23, A2 Milk is going to generate NZ$212.7 million of earnings before interest, tax, depreciation and amortisation (EBITDA) and NZ$134 million of net profit.
Then in FY24, EBITDA could improve to NZ$221.4 million and that net profit could jump 18% to NZ$158 million.
Could the A2 Milk share price rise in August?
It's certainly possible that it could go up, though one month is a very short timeframe in the investment world.
Analysts are suggesting with the forecasts that EPS can rise in FY23, FY24, and FY25.
I believe that an absolute key feature of achieving positive investment returns is profit growth. Shareholders often like to judge a business by looking at the price/earnings (p/e) ratio – that's the multiple of earnings it's trading at.
If earnings keep going up, then the p/e ratio will keep getting lower (and more attractive), unless the A2 Milk share price goes up as well.
So, unless analysts are completely wrong with their predictions of profit growth, the A2 Milk share price could rise in the near future if it's able to tell the market that profit growth is expected in FY24.
In the FY23 half-year result, we saw that revenue was up 18.6% and EPS had grown by 24%. The share buyback of up to NZ$150 million can help with EPS growth because the profit is being shared across fewer shares.
However, the company warned in the FY23 half-year result that it was expecting "increasingly challenging" Chinese infant formula market dynamics. With a fall in the Chinese birthrate in 2022 and the rolling impact from fewer births in prior years, this impacts later-stage infant formula products.
Perhaps it's not surprising that the A2 Milk share price has dropped following that commentary. However, it can still become more profitable despite that if it's able to grow its market share.
