Here’s why the A2 Milk share price just popped then stopped

Dad feeding baby from milk bottle

Dad feeding baby from milk bottle

The A2 Milk Company Ltd (ASX: A2M) share price rose more than 10% today amid news the infant formula business could soon get approval to supply the US market. Then it went into a trading halt.

The company’s shares are frozen at $4.85 apiece — that’s 6.83% above yesterday’s closing price.

There is currently an infant formula shortage in the US after a reported potential contamination at one of the nation’s largest manufacturing plants that produces formula.

Since then, several international producers have swung into action to provide as much product to the US as possible, including Bubs Australia Ltd (ASX: BUB).

However, this relies on the US Food and Drug Administration (FDA) giving product approvals through relaxed importing rules. The US government has also provided planes to transport infant formula into the country.

Good news for A2 Milk shares?

According to reporting by the Australian Financial Review, A2 Milk may get the necessary clearance “as soon as this week” for its application to sell infant formula in the country.

The newspaper reported A2 Milk CEO David Bortolussi said:

We have been informed that our application is under active review, and we hope to be able to support US parents and caregivers during this difficult period.

While A2 Milk doesn’t currently have approval to sell infant formula in the US, it does sell fresh milk into the country.

In its FY22 half-year result, A2 Milk reported that its US segment revenue decreased 5.2% to $32.4 million and earnings before interest, tax, depreciation and amortisation (EBITDA) dropped 41.5%, resulting in a loss of $16.4 million.

However, A2 Milk isn’t alone in awaiting FDA approval to sell its formula products in the US. According to the AFR’s reporting, around 160 companies have applied for FDA approval.

With a population well north of 300 million, the US represents a large potential market for infant formula producers, which is why Bubs, A2 Milk, and many others want a piece of that opportunity.

What will this mean for the company?

For Bubs, it has led to a number of promising developments. Bubs is steadily sending a total of 1.25 million tins of infant formula to the US and has announced a number of supplier agreements with US retailers such as Target and Walmart.

The FDA is also developing a new framework to allow companies with enforcement discretion approval to have a pathway to continue supplying the market beyond November.

So, will A2 Milk manage to get a deal for at least one million tins? How many retailers will A2 Milk be able to work with? Can it fast-track the logistics by signing deals with retailers it’s already selling milk to?

Time will reveal if A2 Milk gets approval then what it’s able to do with it.

Investors seem to be betting on a good outcome.

While the A2 Milk share price has jumped higher today, it’s still 11% lower than it was at the start of 2022.

Trading halt

A2 Milk has entered into a trading halt before making another announcement. The trading halt will stay in place until 4 August 2022, or until an announcement has been made.

The post Here’s why the A2 Milk share price just popped then stopped appeared first on The Motley Fool Australia.

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More reading

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. 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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