Will the A2 Milk Company Ltd (ASX: A2M) share price hit $20 in 2020?
It has already been a strong performer since the start of this year considering there's a coronavirus global pandemic going on. The A2 Milk share price has risen by 26% so far in 2020. Not bad!
The trading update last month told us that in the third quarter to 31 March 2020, revenue was higher than expectations. This came about from increasing buying during COVID-19 as well as beneficial foreign currency changes. The company's a2 products are in high demand.
Indeed, the trading performance is so strong that the full year earnings before interest, tax, depreciation and amortisation (EBITDA) margin is now expected to be between 31% to 32%. Pretty impressive considering the company is aiming for a 30% EBITDA margin.
That's one of the main reasons why I think the A2 Milk share price could keep rising this year. The increase of the EBITDA margin this year shows there's potential for a higher profit margin if the company wasn't investing as much into growth. But it's that growth that will make the biggest difference over the long-term.
There is still so much room for growth.
I think there's still a lot of growth potential in China. A2 Milk is only just getting started in the US – it could turn into a huge division if it goes well.
I'm also excited that A2 Milk will be expanding into Canada through an exclusive licensing agreement with Agrifoods Cooperative. A2 Milk will provide the intellectual property, marketing assets and experience. Agrifoods will provide the distribution and funding for this venture. A range of liquid milk products is expected to be launched later in 2020.
There are plenty of other countries to expand into.
Is the A2 Milk share price a buy?
I think the A2 Milk share price is a buy at 27x FY22's estimated earnings. At 31 December 19 it had a very good cash balance of US$618.4 million. That's a big cash pile that provides excellent stability. The cash could also be used for future shareholder returns or perhaps acquisitions. I think the A2 Milk share price could hit $20 as long as there isn't a market crash.
I'd happily buy some A2 Milk shares for the long-term next week.
