A2 Milk shares are up 30% in a year, is this price sweet or sour?

Young girl drinking glass of milkYoung girl drinking glass of milk

The A2 Milk Company Ltd (ASX: A2M) share price has been a strong performer over the last 12 months, rising by around 30%. That compares to a rise of around 10% for the S&P/ASX 200 Index (ASX: XJO).

But, many other ASX growth shares have suffered in the last year. For example, the Xero Limited (ASX: XRO) share price is down 28% and the Block Inc (ASX: SQ2) share price is down 25%.

A2 Milk shares went through a lot of pain once households stopped stocking their pantry during the COVID-19 pandemic. But, the business seems to be on a recovery path again.

Let’s remind ourselves about what the latest update from the infant formula company said.

Latest update

At the annual general meeting (AGM), in mid-November 2022, the company reminded investors that in FY22 it saw significant progress in implementing its refreshed strategy, which helped with “improved performance”.

A key part of this has been inventory management actions, which are “effective”. Channel inventory is at target levels, leading to product freshness and improved market pricing.

The business is seeing “new highs in brand health”, along with “record market shares and return to growth”.

A2 Milk said the outlook is positive, with continued revenue and earnings growth expected in FY23.

The company has also been buying back millions of A2 Milk shares, with an on-market share buyback of up to $150 million.

A2 Milk is working on its state administration for market regulation (SAMR) registration process, which is “progressing”. The approval is anticipated in the second half of FY23. The company also noted that the China State Farm exclusive import and distribution agreement has been renewed for five years from 1 October 2022.

The business also announced last year that it received US Food and Drug Administration (FDA) approval, with an enforcement discretion, to import infant milk formula into the US.

A2 Milk has a target of achieving $2 billion of revenue by FY26 and improving the earnings before interest, tax, depreciation, and amortisation (EBITDA) margin over time.

Is the A2 Milk share price going to sour from here?

A2 Milk’s earnings are expected to rise each year between FY23 to FY25, according to projections on Commsec.

The current estimates put the company at 37x FY23’s estimated earnings and 29x FY24’s estimated earnings.

After the strong performance by A2 Milk shares and expectations of profit growth, is it worth buying?

Looking at the analyst ratings collated by Commsec about the business, three rate A2 Milk shares as a buy, four rate it as a hold, and five rate it as a sell.

With the company seemingly on track for a recovery, it could be an effective investment – it’s still down around 65% from the high in July 2020.

However, I think A2 Milk will need to make progress in both China and the US for it to continue to excite investors this year.

The post A2 Milk shares are up 30% in a year, is this price sweet or sour? 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 positions in and has recommended Block and Xero. The Motley Fool Australia has positions in and has recommended Block and Xero. 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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