It doesn’t happen often, but the A2 Milk Company Ltd (ASX: A2M) share price was out of form in August.
The infant formula and fresh milk company’s shares fell 12% during the month.
Why did the a2 Milk Company share price tumble lower in August?
There were a couple of catalysts for a2 Milk’s poor form in August. The first was the company’s full year results release.
For the 12 months ended 30 June 2020, a2 Milk Company delivered a 32.8% increase in revenue to NZ$1,730 million. This compares to its revenue guidance range of NZ$1,700 million to NZ$1,750 million.
And due to its earnings before interest, tax, depreciation and amortisation (EBITDA) margin coming in at 31.7%, in line with its guidance range of 31% to 32%, a2 Milk reported a 32.9% increase in EBITDA to NZ$549.7 million in FY 2020.
While this result was undoubtedly strong, it wasn’t quite as strong as some investors were hoping. A2 Milk had been tipped as a company that could smash its guidance in FY 2020 thanks to strong demand for its infant formula during the pandemic.
Thus, a result that was in the middle of its guidance range simply wasn’t enough for investors and sent some to the exits.
In addition to this, the company reported a large increase in its inventory at the end of the period. Its total inventories lifted 36% to NZ$147.3 million. Given that there are concerns that the panic buying from the pandemic may have brought forward sales from future periods, investors appear worried that the company will have excess stock on its hands.
What else weighed on its shares?
In addition to the above, heavy insider selling at the end of August weighed on its shares.
The company’s chairman, chief executive, Asia Pacific chief executive, chief growth and brand officer, and chief operations officer all offloaded large amounts of shares.
For example, the Asia Pacific chief executive, Peter Nathan, sold almost NZ$15.1 million worth of shares.
Given how insider selling is often seen as a bearish indicator (who sells shares if they are confident they are going higher?), I’m not surprised that investor sentiment is low right now.
Is this a buying opportunity?
I remain a fan of a2 Milk Company but I am a touch more cautious on things following the insider selling.
In light of this, I would class its shares as a buy, but suggest investors buy half of a desired holding now and wait until its AGM in November for the other half.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. 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.
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