As a growth investor, this top Australian growth stock has always been on my watch list. In fact, if you invested in A2 Milk Company Ltd (ASX: A2M) shares at the beginning of the year, you would have achieved a stellar return of 25%. So, should you buy shares in a2 Milk?
What's behind a2 Milk's recent share price plunge?
a2 Milk is an Australian company that sells A1 protein-free milk. In the last five days, its share price has sunk 12% to $13.03, due to a global sell-off stemming from uncertainties around global trade stability.
According to an article in the Australian Financial Review yesterday, China has also released a new action plan to increase the market share of Chinese-produced formula from 47% to 60%. This news shook the share prices of Australia's other infant formula makers, with Bellamy's Australia Limited (ASX: BAL), Bubs Australia Ltd (ASX: BUB) and Wattle Health Australia Ltd (ASX: WHA) all dipping around 5%.
It is still unclear exactly how this will impact Australia's key exporters. However, it is known that China has long expressed improving its local production of infant formula. Similarly, China won't risk any drastic short-term changes of restricting imports as to not disappointing consumers.
In this light, I believe the drop in the share price to be a promising opportunity. a2 Milk has also built strong relationships with locals, which they benefit lucratively off via Diagou distribution channels. a2 Milk's relationship with its distributors has been key to its market success.
The company also flaunted strong half-year results, with EBITDA up 52.7% to $218.4 million, driving earnings per share up 52.9% to 20.9 cents. This was a result of strong regional performance, namely a 45.3% increase in infant formula in China and overall growth in milk powders across regions of 40.4%.
While the new targets for domestic production in China may foster concern, a2 Milk's regional segment grew by 50.1%. Market share has risen from 5.4% to 6% and as the company continues to create high-quality formulas, consumer expenditure will continue to attract strong growth.
Foolish takeaway
a2 Milk is still operating on a 74x price-to-earnings ratio. This is high even compared to the WAAAX tech stocks, yet I believe that a2 Milk's future growth potential is strong, and it will continue to hold a competitive advantage in China.
If you're also looking at investing in other high-flying shares to diversify your portfolio, perhaps this growing industry may pique your interest.
