The A2 Milk Company Ltd (ASX: A2M) share price hit an all-time record high of $20.05 last Thursday. Rather than pushing higher, its shares fell 4.23% on Friday. Could this be an opportunity to buy a2 Milk shares at a discount?
What caused the sell off of a2 Milk shares?
On Friday, the a2 Milk share price fell on no news, despite the S&P/ASX 200 Index (ASX: XJO) closing up 0.10%.
The slump could be attributed to the a2 Milk share price rising 10% during the week, with shares hitting $20 for the first time and the company reaching a record $14 billion market capitalisation. Rather than pushing higher, investors might have taken this opportunity to sell shares to lock in profits.
Is the a2 Milk share price a buy?
It is a fragile time to be buying shares, given how much the market has run up. Not only is the US and South America struggling to contain the coronavirus, but there are increasing fears of a second wave across Europe, China and Australia. Quantitative easing and record money supply across the world has created a serious discrepancy between the real economy and the markets. It is difficult to tell if the markets will continue pushing, or if a correction is imminent.
Despite the inherent risks in the broader economy and markets, I believe the a2 Milk share price is fair value at today’s prices. The company has a strong track record of consistent growth and the coronavirus may incite further tailwinds for its revenues moving forward.
a2 Milk provided the market with a trading update and FY20 outlook on 22 April. The update highlighted that the business has continued to experience strong revenue growth across all key regions, particularly in its infant nutrition products sold in China and Australia. a2 Milk’s 3Q20 revenue was above expectations – the company attributed this result primarily to changes in consumer purchase behaviour and impulsive pantry stocking.
The company’s 2H20 earnings before interest, tax, depreciation and amortisation margin is also anticipated to be higher than previously expected. Expanding margins have been driven by higher revenue from higher margin nutritional products, partly due to consumer pantry stocking in 3Q20, favourable foreign exchange rate movement, and lower than expected costs for travel.
The overall performance for FY20 should see ongoing revenue growth across its key regions supported by its significant investment in marketing for China and US. Notwithstanding the uncertainty, it anticipates revenue for FY20 in the range of $1,700 million to $1,750 million. This would represent a 30.4% to 34.2% increase on FY19 revenue.
Foolish takeaway
If the broader market is sold off, then the a2 Milk share price will get dragged down along with it. While I wouldn’t be in a hurry to buy a2 shares, I believe the company is fundamentally in a good place and continued earnings momentum should be expected.
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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The post Is the a2 Milk share price a buy after falling nearly 5% on Friday? appeared first on Motley Fool Australia.
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