Why the a2 Milk Company Ltd share price is at a record high

a2 Milk Company Ltd (ASX: A2M) shares look a buy to me.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The a2 Milk Company Ltd (ASX: A2M) share price hit a record high of $16.09 in trade today and could have further to rise if analysts at Goldman Sachs and UBS are on the money in handing out 12-month share price targets even higher than today's.

I also made a2 Milk my top stock to buy in July when it changed hands for $13.86 and not for nothing either.

The stock looked good value back then given it continues to boast very strong growth rates with an outlook supported by its success in China, Australia and the US. 

a2's core business is the sale of infant informula with it reporting 42% revenue growth for the nine months to March 31 2019 with a forecast for EBITDA margins to stay in the range of 31% to 32%. These are some impressive numbers given the business is reinvesting heavily in sales and marketing expenses to grow in large markets like China and the U.S. 

a2 also has a strong balance sheet with no debt and NZ$288 million cash on hand, as such I expect management will one day in the future start to pay a dividend or potentially even buy back shares on issue.  

Its return on equity is also high at 37.5% in FY 2019 and 35.2% in FY 2018. Generally when you can find assets this profitable and growing at strong rates shares are likely to get bid up higher over time in my opinion. 

While most investor attention on a2 is understandably focused on the high-growth, but unpredictable China market, I also think over the longer term it has an excellent opportunity to grow sales of its supermarket milk in the US.

As at January 2019 it was being distributed via 12,000 stores including at leading chains such as Walmart, Safeway and Costco. If this business takes off I expect the market will once again be eager to bid the shares higher. 

Overall for anyone looking to play the rising Chinese consumer theme I think a2 Milk is definitely the best stock to own.

However, of course investors must remember that as a highly-valued growth stock it has considerable downside risk if it doesn't deliver on investors' great expectations.

Others that might interest investors, but not myself, include Bubs Australia Ltd (ASX: BUB), Bellamy's Australia Ltd (ASX: BAL) or wine retailer Treasury Wine Estates Ltd (ASX: TWE).

Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. The Motley Fool Australia has recommended Bellamy's Australia and BUBS AUST FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

A golfer celebrates a good shot at the tee, indicating success.
Share Market News

Here are the top 10 ASX 200 shares today

ASX investors finally enjoyed a win this Thursday...

Read more »

a man sits back from his laptop computer with both hands behind his head feeling happy to see the Brambles share price moving significantly higher today
Industrials Shares

Up 39% in a year, is there more growth to come for this ASX 200 share?

IML Equity Analyst Josh Freiman shares his views on a major ASX 200 industrial stock.

Read more »

Man looking at his grocery receipt, symbolising inflation.
Share Market News

What the latest US inflation print means for ASX 200 investors

The ASX 200 is likely to benefit if the US Fed cuts interest rates again in December. But will it?

Read more »

guy helping girl invest in shares and dividends
Opinions

5 ways for investors buying ASX shares to stay focused during economic uncertainty

AMP Chief Economist, Dr Shane Oliver, offers advice on how to handle the Trump factor.

Read more »

A worried man holds his head and look at his computer.
Share Fallers

Why Graincorp, Light & Wonder, Orica, and Wildcat shares are falling today

These shares are having a tough time on Thursday. But why?

Read more »

A young women pumps her fists in excitement after seeing some good news on her laptop.
Share Gainers

Why Catapult, Flight Centre, Nufarm, and Xero shares are storming higher today

These shares are having a strong session on Thursday. But why? Let's find out.

Read more »

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
Opinions

1 ASX growth stock down 30% I'd buy right now

This international business is growing core earnings at a strong rate.

Read more »

Concept image of a man in a suit with his chest on fire.
Record Highs

How long can the CBA share price keep this up?

Australia's biggest bank is running hot. Does it make any sense?

Read more »