What are brokers saying about A2 Milk shares?

Is it time to snap up this stock or should you keep your infant formula powder dry?

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A2 Milk Company Ltd (ASX: A2M) shares are on form and rising nicely on Tuesday.

At the time of writing, the infant formula company's shares are up almost 2% to $5.86.

Why are A2 Milk shares rising?

Investors may have been buying the company's shares today after Bell Potter released a note that touched on recent industry data.

While the industry data was somewhat mixed, it has led to a modest increase in the broker's earnings estimates through to FY 2026.

Commenting on the China market, the broker said:

Three listed IMF entities have recently reported. In aggregate we noted: (1) Average contribution margin contraction of 500bp with a spread of -1300-to-+120bp in 1H24 (vs. A2M of -180bp); (2) Average revenue growth of -20% YOY (vs A2M of +2% YOY) with revenue per distribution point (where reported) down -15% YOY in NZD terms (vs. A2M of +5% YOY); and (3) CY24e outlook comments generally suggested a stabilising but competitive market.

Bell Potter has also been looking at Chinese import data. It adds:

Imports of IMF into China have remained subdued, down -62% YOY in Mar'24 and down -36% YOY on a R12M basis. While changes in GB standards and inventory distortions are difficult from a pcp perspective, the level of imports into China remains at historically low levels and has been since Jun'23.

Is A2 Milk a buy

Although the broker has a positive view on A2 Milk, it feels its shares are fully valued now compared to peers.

As a result, it has only retained its hold rating and $5.70 price target. This is a touch lower than where its shares trade today. Bell Potter explains:

Our Hold rating is unchanged. The PRC label transition has been executed well to date, with reported IMF revenues sustained in a falling market (at NZ$1.1Bn on a R12M basis at 1H24). However, A2M (at ~16x FY24e EBITDA) is trading at a reasonably large premium to China facing IMF (~10-11x FY24e EBITDA) and global Dairy entities (~12-13x FY24e EBITDA). In the near term, competitor commentary continues to suggest a difficult sector trading backdrop and we note overall levels of inbound inventory movements into China remain subdued.

Elsewhere, while most brokers have hold ratings on its shares, the team at Ord Minnett is an outlier and feeling a lot more bullish.

A note from February reveals that the broker has an accumulate rating and a $7.40 price target on its shares. This implies a potential upside of 25% for investors from current levels. Time will tell which brokers make the right call.

Motley Fool contributor James Mickleboro 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 Scott Phillips.

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