Is the A2 Milk Company Ltd (ASX: A2M) share price a buy?
2018 has been a funny year for a2. The a2 share price is up by just over 34% since the start of the year, yet it's down by 24% since its March all-time high. It's been a rollercoaster for the share prices of Bubs Australia Ltd (ASX: BUB) and Bellamy's Australia Ltd (ASX: BAL).
In the past you wouldn't think of milk, ice cream or baby formula as products that could demand a premium pricing. That's precisely what A2 milk has managed to do. Its products are seen as high-quality and worth paying a bit more for.
Those products are so popular that Chinese customers are happy to pay a multiple of two or three times more of the Australian price for the product.
Chinese demand has been a key reason for a2's excellent strength over the past few years. China is a huge market, so a2 has plenty of potential for continued volume growth and higher prices.
Growing demand and economies of scale has seen earnings before interest, tax, depreciation and amortisation (EBITDA) and net profit after tax (NPAT) grow much faster than revenue. That's how both EBITDA and NPAT was able to more than double in FY18.
In the first four months of FY19, a2 Milk reported its revenue was up 40.5% compared to the first four months of FY18, EBITDA was up 58.5% and NPAT was up 64.5%.
But, it may not be plain sailing for a2 or its profit growth. It's increasing its marketing spending to help its China and US market expansion plans. Cynics may also say that the increased investment is to combat additional competition from Nestle which launched its own a2 protein range of baby formula.
Foolish takeaway
According to analyst estimates, it's trading at 31x FY19 and 24x FY20 estimated earnings. I think it looks quite attractive at this level for the long-term considering it's still growing very well in China and the USA, particularly with a2's confidence that it can meet the new Chinese e-commerce selling requirements before the March 2019 deadline.
However, I can understand if you think the a2 Milk share price may fall further in the coming weeks, so there may be better growth shares to buy today.
