Why is the A2 Milk share price tumbling lower toda

The A2 Milk Company Ltd (ASX: A2M) share price has come under pressure on Friday.

At the time of writing, the infant formula company’s shares are down 3% to $5.38.

Why is the A2 Milk share price falling?

Investors have been selling down the A2 Milk share price on Friday after the company was the subject of a bearish broker note out of Goldman Sachs.

According to the note, the broker has initiated coverage on the company with a sell rating and $5.80 price target.

Based on the current A2 Milk share price, this still implies potential upside of almost 8% from current levels despite the sell rating.

What did the broker say?

Goldman was pleased with A2 Milk’s performance in FY 2022 and highlights the company’s solid operational execution during the second half.

However, it has warned investors that it could be hard for the company to replicate this in FY 2023 due to a number of challenges. It explained:

Despite solid operational execution in 2H22, we believe this result will be challenging to replicate in FY23 given (1) overall market challenges in the context of a declining birth rate and a shift towards BCD (lower-tier) cities; (2) a step-up in competitive intensity in FY23 resulting in more intensive marketing; and (3) near-term risks around product transition (refreshed EL [English label] product, upcoming new Chinese National Standards (‘GB’) transition impacting CL [Chinese label]) and pending regulatory licenses.

In light of this, the broker is sitting below consensus estimates for earnings.

Our FY23/FY24/FY25 EPS estimates sit 6%/1%/3% below consensus (Bloomberg), which is predominately driven by higher marketing costs as well as caution on near-term sales growth. Our FY23E forecasts are broadly consistent with management guidance (7.9% revenue growth vs. high single-digit growth guided), although our EBITDA margin forecast is in line with FY22 (vs. guidance for marginally ahead) reflective of our view around higher marketing intensity.

The team at Bell Potter don’t appear to agree with this view. Its analysts recently upgraded A2 Milk’s shares to a buy rating with a $6.35 price target. Time will tell which broker makes the right call.

The post Why is the A2 Milk share price tumbling lower toda appeared first on The Motley Fool Australia.

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More reading

• 5 things to watch on the ASX 200 on Friday
• Why has the A2 Milk share price leapt 17% in a fortnight?
• Why is A2 Milk buying back shares?
• Here are the top 10 ASX 200 shares today
• Why did the A2 Milk share price smash the market with a 22% gain in August?

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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