Is a2 Milk Company Ltd (Australia) (ASX: A2M) an opportunity at today's share price? Shares in the company have risen 113% in the past 12 months, and are up 575% since listing.
While a2 has plenty of growth available to it in the UK, the USA, China, and even in the ANZ region, the company looks very expensive today, at least on some metrics. Shares are priced at an estimated 27x full year profit, or ~20x on an enterprise value (market cap + net cash) to EBITDA (EV/EBITDA) range.
This compares to around 16x and ~8x respectively for the average company on the ASX. In my view, a2 shares are a little overpriced today. However, if the alternative were buying something like Woolworths Limited (ASX: WOW) simply because it is 'cheaper' then I (as a young, growth-focused investor) would choose a2 every time.
Additionally, while shares may be overpriced, they also have a good shot at living up to their potential over the next 5-10 years, thanks to the company's growth plans. Equally important, a2 has a clean balance sheet with a modest amount of cash and zero debt, putting it in a position to better endure stresses or upsets.
So before investing, investors should consider both the relative attractiveness of investments other than a2, as well as their intended timeframe for investing. In my opinion, it would take just one short-term upset to knock a lot of the gloss off a2's shares, which are currently riding high on the back of multiple profit upgrades.
However, looking out to the longer term, the business appears to have considerable potential, which is why I continue to hold my shares.
