How do A2 Milk shares stack up against Bubs post-earnings season?

The A2 Milk Company Ltd (ASX: A2M) share price has risen by 16% since the baby formula company released its FY22 results on 29 August.

The a2 milk share price has outperformed the Bubs Australia Ltd (ASX: BUB) share price in the past five days. But the big question is whether a2 milk shares can continue the momentum over the long run.

Let’s put these two infant formula companies toe-to-toe.

FY22 results recap

A2 milk recorded strong results in FY22 as covered by my colleague, James. Revenue grew 19.8% to NZ$1.4 billion and net profit after tax (NPAT) went up 42.3% to NZ$114.7 million.

Earnings from A2 milk’s core geographies of Australia and New Zealand actually fell from NZ$558.3 million in FY21 to NZ$530.5 million in FY22. This is a bit concerning given these are a2 milk’s local markets.

However, sales in China and other Asian countries produced a major uplift, surging from NZ$583.4 million in FY21 to NZ$726.5 million in FY22. It seems the 36.3% increase in marketing to drive brand awareness paid off.

Operating cash flow improved from NZ$89.4 million in FY21 to NZ$203.8 million in FY22.

However, investors should bear in mind that the stronger performance in FY22 was largely due to the 75% acquisition of Mataura Valley Milk. This resulted in a cash outflow of NZ$213.7 million.

Despite a2 milk being in negative free cash flow territory, broker Bell Potter upgraded a2 milk shares to a buy rating. The price target is up by a third to $6.35.

Analysts at Bell Potter believe a2 milk is capable of producing strong earnings growth to FY26.

A2 milk versus Bubs

Despite recording a record result in FY22, the Bubs share price didn’t move all that much. Revenue grew 123% to $104.2 million in FY22 and the net loss was improved from $74.7 million in FY21 to $11.4 million in FY22.

The significant rise in sales was due to a material supply deal in the United States. The biggest reason for the shortage in supply of baby formula was the closure of Abbott Nutrition’s factory in Michigan.

The US Food and Drug Administration (FDA) closed the largest producer in the country due to the discovery of bacterial infections.

Abbott Nutrition’s factory site has been suspended since February but it restarted production in early June under FDA’s watchful eye.

This development is important because it could ultimately mean reduced reliance on overseas infant formula producers like Bubs.

A2 milk is still yet to benefit from the situation in the US as it awaits FDA approval. However, a2 milk is in a much stronger financial position with NZ$887.3 million in cash whereas Bubs holds $16.3 million and is still not yet profitable.

A2 milk share price snapshot

The a2 milk share price has fallen by 1.4% in the past year. But it has rallied strongly in the past month, rising by 16%. It closed Thursday’s session at $5.70, up 2.7% for the day.

In contrast, the Bubs share price has experienced strong growth of 38% in the past year. But it’s down 2.6% in the past month. Bubs finished the session today at 56 cents, down 0.9% for the day.

The market capitalisation of a2 milk is around NZ$4.73 billion.

The market capitalisation of Bubs is around $418 million.

The post How do A2 Milk shares stack up against Bubs post-earnings season? appeared first on The Motley Fool Australia.

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More reading

• Here are the top 10 ASX 200 shares today
• These were the best performers on the ASX 200 in August
• Broker says A2 Milk share price can keep rising
• Why Bell Potter is tipping 40% upside for the Bubs share price
• Here are the top 10 ASX 200 shares today

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 and BUBS AUST FPO. 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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