The A2 Milk share price has fallen 16% in around two months: Time to buy?

A man in a business suit holds a mobile phone to his ear while he drinks a large glass of milk.A man in a business suit holds a mobile phone to his ear while he drinks a large glass of milk.

The A2 Milk Company Ltd (ASX: A2M) share price has fallen 16% since 7 March 2023. That’s significant underperformance compared to the S&P/ASX 200 Index (ASX: XJO), which has declined by just 0.4% over the same time period.

The company has been through a lot since the start of the COVID-19 pandemic. But investors have become more confident since May 2022, sending the A2 Milk share price up 40% in that time.

The A2 Milk share price is down 1.2% to $5.78 at the time of writing today.

What has driven A2 Milk shares higher in the past year?

The FY23 first-half result showed a recovery for both revenue and earnings as A2 Milk executed on its refreshed growth strategy.

Total revenue rose 18.6% to $783.3 million, despite sales in Australia and New Zealand falling 24.6%. Chinese and Asian sales were up 54%, while sales in the United States lifted 61.8%, and Mataura Valley Milk (MVM) sales were up 18.4%.

Earnings before interest, tax, depreciation and amortisation (EBITDA) improved by 10.5% to $107.8 million. Net profit after tax (NPAT) grew by 22.1% to $68.5 million.

There were other positives, including the $150 million share buyback which started in the first half of FY23 and was 60.1% complete. The company also advised it had a “strong” balance sheet, with closing net cash of $707.2 million.

A2 Milk noted that it had reached historical highs in China with brand awareness. At the same time, it reached record market shares in the Chinese label infant formula in mother and baby stores (MBS) and domestic online channels.

The company’s English label infant formula share improved in cross-border e-commerce (CBEC) and daigou channels.

Did it get too frothy?

Sometimes, the market can become too optimistic about a company’s prospects.

Earnings are expected to rise over the next couple of financial years, according to Commsec. In FY23, it might make 19.1 cents of earnings per share (EPS), which would put the A2 Milk share price at 30x FY23’s estimated earnings.

FY24 EPS could grow to 23.6 cents, which would put the A2 Milk share price at 24x FY24’s estimated earnings.

A2 Milk warned with its HY23 result that it expected low double-digit revenue growth in FY23. It said:

The increasingly challenging China infant formula market dynamics to continue due to fewer births in CY22 and the rolling impact from fewer births in prior years on later stage infant formula products.

It is also expected that the English label market will continue to be impacted by the evolving channel dynamics and a further shift towards the China label market. The China infant formula market is also expected to experience a degree of disruption with the market transitioning from current to new GB registered product during CY23.

I think the key for driving the A2 Milk share price higher is earnings growth. The business is seeing the positives of revenue growth. Growing the scale of the business can help improve its chance of increasing the EBITDA margin.

Ongoing revenue growth in China and the US is very promising because of how large those markets are. I think the business can keep growing in the US with its liquid milk sales and, hopefully, infant formula success.

While the company is spending a lot on marketing, it should help deliver revenue growth.

I think A2 Milk is worth a long-term buy, but there could still be a lot of volatility in the next few couple of years. But, it should help that A2 Milk is carrying out a share buyback, which can increase the value and EPS of the company’s remaining shares.

The post The A2 Milk share price has fallen 16% in around two months: Time to buy? appeared first on The Motley Fool Australia.

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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.

from The Motley Fool Australia

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