Despite the market sinking lower for a fourth day in a row, the a2 Milk Company Ltd (Australia) (ASX: A2M) share price has managed to push higher.
At the time of writing the dairy company's shares are 4% higher at $7.10.
Is it time to buy a2 Milk shares?
Judging by the market reaction today, many investors appear to believe that a2 Milk's shares are good value again following its sharp decline over the last few weeks. The dairy company's shares are down over 10% from their October-high of $7.91.
Whilst I would agree that a2 Milk does look to be better value now than it did then, it does still trade at a significant premium to the market-average. At present its shares are changing hands at approximately 60x trailing earnings.
Management will provide its FY 2018 guidance next week at its annual general meeting and it will certainly have to be strong to justify this premium.
Considering the strong demand for its infant formula and the fact it has received its CFDA approval to continue selling into China next year, there is every chance that its guidance will be sufficient.
But equally it is worth remembering that should its guidance fall short of the market's expectations then its shares could come crashing down.
According to research notes I have seen, analysts are expecting earnings per share in the range of 19 to 20 New Zealand cents in FY 2018. This represents growth of between 49% and 57% year-on-year.
In my opinion, the risk/reward on offer at this point does not justify an investment and I would suggest investors hold off until its November 21 meeting. While you may miss out on a few gains if the guidance is good, you could ultimately save yourself from heavy declines if the guidance underwhelms.
