The A2 Milk Company Ltd (ASX: A2M) share price has continued to soar higher during the coronavirus crisis, while many companies on the S&P/ASX 200 Index (ASX: XJO) have struggled.
Since the beginning of February, a2 Milk shares have increased from $14.16 to their current price of $18.84, at the time of writing. Demand for a2 Milk’s products has remained high throughout the crisis. But aside from the company’s strong performance recently, here’s why I think a2 Milk shares are a good option to buy and hold for the long term.
Strong financial performance
In its half year FY 2020 results, a2 Milk recorded a very strong 31.6% increase in total revenue to NZ$806.7 million. Earnings also grew strongly despite the company’s aggressive growth strategy, with earnings before interest, tax, depreciation and amortisation (EBITDA) increasing 20.5%. A2’s Liquid Milk business continues to grow strongly in Australia and New Zealand, while sales for the company doubled in its United States market.
In its most recent trading update, a2 Milk revealed continued strong growth from late February to late April across all regions. Demand for the company’s infant nutrition products sold in China and Australia has been particularly robust.
Chinese and US markets key to a2 Milk’s long-term success
I believe that continued expansion into the US and China will be key to a2 Milk’s success over the next 5 years. In particular, the Chinese market still holds huge untapped potential for the ASX and NZX dual listed company. Not only is the size of this market very large, Chinese consumers are increasingly choosing premium brands over mass market products. A growing number also have a preference for foreign brands, especially for specific market niches like infant formula.
However, a significant degree of regulatory risk still remains in China. Bellamy’s Australia Ltd has already witnessed some obstacles in this respect. Also, competition in the Chinese market is growing from locally based providers such as Junlebao Dairy.
Foolish takeaway
It appears the market has already factored in ambitious growth targets for a2 Milk. And, if these targets are not met, then the company’s share price would most likely be negatively impacted. I’m confident, however, that a2 Milk remains reasonably well positioned to continue growing and realise its future plans.
I also believe that a2 Milk’s well-established brand name and entrenched position in the Australian market gives it the edge over other infant formula providers such as Bubs Australia Ltd (ASX: BUB) and Nuchev Ltd (ASX: NUC).
In my mind, this makes a2 Milk shares a good buy and hold proposition for the long term.
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Phil Harpur owns shares of A2 Milk. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of BUBS AUST FPO. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended BUBS AUST FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The post Why I’d buy and hold a2 Milk shares until 2025 appeared first on Motley Fool Australia.
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