Why this broker sees 40% upside for the A2 Milk (ASX:A2M) share price

Here's why this broker likes A2 Milk…

| More on:
Broker looking at the share price on her laptop with green and red points in the background.

Image source: Getty Images

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

Key points

  • The A2 Milk share price has been smashed over the last 12 months.
  • The team at Bell Potter believe this has created a buying opportunity for investors.
  • The broker sees 40% upside for its shares over the next 12 months.

The A2 Milk Company Ltd (ASX: A2M) share price has been a very poor performer over the last 12 months.

Since this time last year, the struggling infant formula company's shares have lost 40% of their value.

This means the A2 Milk share price is now down by over 70% since the middle of 2020.

Is the weakness in the A2 Milk share price a buying opportunity?

Opinion remains largely divided on the A2 Milk share price. However, one broker that is brave enough to recommend the embattled company as a buy is Bell Potter.

According to a recent note, the broker has a buy rating and $7.70 price target on the company's shares.

Based on the current A2 Milk share price of $5.38, this implies potential upside of 43% for investors over the next 12 months.

What did the broker say?

Bell Potter saw enough positives in A2 Milk's half year results last month to remain positive on the company.

It commented: "Our Buy rating remains unchanged. We saw plenty to like in this result: (1) growth in stage 1 market share in the MBS [mother and baby store] channel from 2.1% to 2.5% (indicative of new customer recruitment); (2) a beat in China direct channels sales in 1H22 and a closer alignment of sell-in and sell-out levels in 2Q22; (3) reinvestment of outperformance into marketing, to support FY23-24e revenue growth; and (4) progress on articulating a margin capture strategy at MVM."

Importantly, Bell Potter has not made any material changes to its earnings estimates following its results. It continues to expect the company's underlying net profit to be double FY 2021's levels in FY 2024.

Based on this, the broker estimates that the A2 Milk share price currently trades at approximately 28x FY 2024 earnings. While this is not conventionally cheap, Bell Potter appears to believe it deserves to trade at this level.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Broker Notes

A female broker in a red jacket whispers in the ear of a man who has a surprised look on his face as she explains which two ASX 200 shares should do well in today's volatile climate
Broker Notes

5 of the best ASX 200 shares to buy in June

Let's see what brokers are recommending to investors for next month.

Read more »

A young man pointing up looking amazed, indicating a surging share price movement for an ASX company
Broker Notes

These ASX 200 shares could rise 20% to 100%

Analysts are expecting these shares to deliver big returns over the next 12 months.

Read more »

Three people in a corporate office pour over a tablet, ready to invest.
Broker Notes

Top brokers name 3 ASX shares to buy next week

Brokers gave buy ratings to these ASX shares last week. Why are they bullish?

Read more »

Broker looking at the share price.
Broker Notes

Brokers name 3 ASX shares to buy today

Here's why brokers are feeling bullish about these three shares this week.

Read more »

A smiling woman at a hardware shop selects paint colours from a wall display.
Broker Notes

After its strategy day, what does Macquarie think Wesfarmers shares are worth?

Let's see what the broker is saying about this blue chip.

Read more »

Buy, hold, and sell ratings written on signs on a wooden pole.
Technology Shares

After surging 13% yesterday, are TechnologyOne shares a buy, hold or sell according to Macquarie?

Valuations matter when investing, and Macquarie feels no different.

Read more »

A woman presenting company news to investors looks back at the camera and smiles.
Broker Notes

Broker reveals which ASX stocks are rate-cut winners

Macquarie is tipping three further interest rate cuts in July, August, and November.

Read more »

Ecstatic woman looking at her phone outside with her fist pumped.
Broker Notes

Where to invest $1,000 into ASX 200 shares in June

Goldman Sachs is tipping these shares as buys. Let's find out why.

Read more »