The Bellamy's Australia Ltd (ASX: BAL) share price has rebounded from yesterday's decline and stormed 9% higher to a record high of $16.30 on Friday.
The good news for shareholders is that one leading broker doesn't expect the gains to stop there.
According to a note out of Goldman Sachs, the broker saw enough in the infant formula company's half-year results release to upgrade its shares from neutral to a buy rating.
Furthermore, its analysts have increased their 12-month price target all the way to $18.00. This implies potential upside of over 10% from the record-high it made earlier today.
Why is Goldman Sachs so bullish?
This upgrade has largely been made on the back of its belief that Bellamy's gross margin expansion opportunity is under appreciated by the market.
Goldman thinks that gross margins could lift largely due to a reduction in unit costs of ingredients and production as volumes rise and also through the renegotiation of a number of legacy supply agreements. The broker thinks these are likely to have unfavourable pricing terms currently.
Because of this the broker has increased its earnings estimates for FY 2018 through to FY 2020.
In FY 2018 earnings per share are now expected to come in at 40 cents, before rising to 62 cents in FY 2019, and then 79 cents in FY 2020. Previously Goldman had expected earnings per share of 39 cents, 55 cents, and 68 cents, respectively.
Should you invest?
I think Goldman makes some valid points in its report and investors should take note of its recommendation and consider snapping up shares today.
I feel confident that Bellamy's is positioned perfectly to capitalise on the insatiable demand for ANZ infant formula and expect it to deliver on Goldman's bullish forecasts.
Which means its shares are currently priced at approximately 26x estimated FY 2019 earnings. I don't think this is overly expensive given its current growth profile, just as long as its CFDA approval comes in as expected in the middle of the year.
All in all, I think Bellamy's may represent even better value for money that A2 Milk Company Ltd (ASX: A2M) and is certainly a better option to smaller rivals Bubs Australia Ltd (ASX: BUB) and Wattle Health Australia Ltd (ASX: WHA).
