The a2 Milk Company Ltd (Australia Ltd) (ASX: A2M) share price crashed through $4 this morning as investors bid up the stock in expectation of a strong profit report and outlook this August.
I wrote back on June 16 after a2 Milk upgraded its revenue growth guidance that it would only be a short time before the stock had a $4 handle in front of it thanks to the sales growth of its a2-only-protein infant formula and supermarket milk products.
On June 16 the company flagged accelerated sales growth for the quarter ending June 30 2017 and guided that full year sales should come in around NZ$545 million.
Given the company's share price has been rising since on no news it's likely the driver of the rising share price is upgrades to analysts' expectations, "price targets", or valuations on the stock.
As I wrote on June 19 "the latest guidance suggests sales are accelerating for the quarter ending June 30 2017, which is an important consideration for forward-looking analysts valuing stocks on estimations of discounted future cash flows."
The ASX's best disruptor?
Investors will read a lot of hyperbole from management teams and the finanacial media over disruptive companies in the tech or healthcare sectors on the ASX, but the reality is almost none of them are capable of delivering big returns to investors as disruptors.
And while a2-only-protein milk isn't a sexy story compared to the latest hot tech stock, it may be the ASX disruptor to bet on in order to generate out-sized returns.
a2-only-protein infant formula
The company's main revenue generator remains its a2-only-protein infant formula, where Chinese and wider Asian sales accounted for around 15% of total infant formula sales for the period ending June 30 2017, with Australia still the group's main infant formula market.
However, most of the hopes for long-term growth are pinned on China where it is thought the group accounts for around a 3% market share.
A2-only-protein supermarket milk
The other potential growth driver is the group's a2-only-protein supermarket milk for kids and adults that will commonly sell for $4.99 in the supermarket, compared to $1.99 for standard milk. Despite the big price gap sales growth in Australia is robust as it disrupts the milk market and the group is aiming to replicate its ANZ success in the large U.S. and U.K. consumer markets.
As an investor you can say what you like about the debatable science behind a2-only-protein milk, but you can't say that consumers aren't lapping it up and given the group's addressable global markets the stock price may follow profit growth far higher yet.
Risks
Considerable risks include competition from powerful global operators in the dairy and infant formula space, supply chain management, and the unpredictable nature of the Chinese market in particular.
The problems at organic-infant-formula business Bellamy's Australia Ltd (ASX: BAL) should be a warning to anyone getting carried away over the prospects of a2 Milk.
When the company reports in August all eyes will be on whether it gives forward guidance with its big valuation meaning the market is expecting more growth. Any disappointment could see heavy share price falls.
