The A2 Milk share price has bubbled 10% higher in a month. What’s going on?

A little Asian girl is so excited by the bubbles coming out of her bubble machine.A little Asian girl is so excited by the bubbles coming out of her bubble machine.

The A2 Milk Company Ltd (ASX: A2M) share price has gone up by around 10% since 22 June 2022. That compares favourably to the S&P/ASX 200 Index (ASX: XJO), which has risen by just over 4%.

That’s quite a bit of outperformance over a short period.

A2 Milk is a large dairy business that sells infant formula, protein-free milk, and other milk products.

Let’s have a look at what may be affecting things, aside from just the wider market climbing.

Strong demand

One of A2 Milk’s main competitors, Bubs Australia Ltd (ASX: BUB), recently reported that it’s experiencing a lot of growth, which may (or may not) be a positive indicator for A2 Milk.

For the three months to 30 June 2022, Bubs revealed that gross revenue had increased by 278% to $48.1 million. Half-year gross revenue of $65.7 million was up by 71% half on half.

It also reported it had seen sustained growth momentum across all key product segments (including its A2 product) and all key markets (including Australia, China and the United States).

While some of this growth came about from Bubs’ activities in the US, it also reported promising signs in Australia and China.

Australian domestic retail sales revenue of infant formula saw growth of 31% year on year.

Bubs’ Chinese sales were up 523%, largely due to corporate daigou sales. However, cross-border e-commerce sales were up 20%.

A2 Milk expecting to report growth in the second half

When A2 Milk announced its FY22 half-year result, the company said that the revenue growth outlook for the business in FY22 had improved.

However, it also said the expected improvement in revenue is not likely to translate into higher earnings in FY22 as it increases its investment to drive growth.

Even so, revenue in the second half of FY22 is still expected to be “significanly higher” than the second half of FY21, with anticipated growth compared to the first half of FY22 and FY22 being ahead of initial expectations mainly because of growth in infant formula sales.

However, it did warn that COVID-19 impacts on the supply chain have increased and are/were a key risk in the second half.

Is the A2 Milk share price a buy?

Some recent broker opinions are neither optimistic nor pessimistic.

For example, the broker Credit Suisse has a price target of $5.15 on the business, with a neutral rating. That implies a possible rise of more than 10%. The company notes recent sales strength in China.

Citi is also neutral on the business, with a price target of $4.64. So, the broker isn’t expecting much movement from here over the medium-term.

The post The A2 Milk share price has bubbled 10% higher in a month. What’s going on? appeared first on The Motley Fool Australia.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Tristan Harrison 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 and BUBS AUST FPO. 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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