At almost $7, can the A2 Milk share price go any higher?

Is the market still underestimating A2 Milk?

| More on:
Young girl drinking milk showing off muscles.

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

  • A2 Milk shares have rallied strongly over the past year
  • It’s generating revenue growth again after a difficult pandemic period
  • I think it’s doing well, but I’m not as enthusiastic to invest as a year ago

The A2 Milk Company Ltd (ASX: A2M) share price has performed admirably in the last year, rising by around 25% and almost reaching $7.

It's a bit of a redemption story for A2 Milk considering the company was trading at around $20 during mid-2020.

The infant formula business is recovering from COVID-19 impacts when there was a huge disruption to daigou buyers.

With the business now reporting positive signs of a turnaround, can things get even better?

Earnings turnaround

Created with Highcharts 11.4.3A2 Milk PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

A2 Milk reported in the FY23 half-year result that total revenue rose by 18.6% to $783.3 million. There was a very mixed performance within that overall number, though.

While China and other Asian sales increased 54% and sales in the United States went up 61.8%, it was a different story in Australia and New Zealand where sales decreased by 24.6%.

Pleasingly, the company said it reached historical highs in China brand awareness, trial and loyalty metrics. It also achieved record market shares in Chinese label infant formula in 'mother and baby stores' and domestic online channels.

The English label infant formula share improved in cross-border e-commerce and daigou channels.

A2 Milk's earnings before interest, tax, depreciation and amortisation (EBITDA) increased 10.5% to $107.8 million and the net profit after tax (NPAT) increased by 22.1% to $68.5 million. Earnings per share (EPS) jumped 24.1% to 10 cents.

The company said that its share buyback of up to $150 million, which started in the FY23 first half, was 60.1% complete.

Things were good in the first half, but the share market can be very focused on the future, which would then influence the A2 Milk share price.

FY23 growth expected

A2 Milk is expecting FY23 revenue to show growth of low double digits, with an EBITDA margin similar to FY22.

However, there is a negative for the business in terms of the industry dynamics.

The Chinese infant formula market dynamics are "increasingly challenging" due to fewer births in the 2022 calendar year and the rolling impacts from fewer births in prior years on later-stage infant formula products.

A2 Milk also expects that the English label market will "continue to be impacted by the evolving channel dynamics and a further shift towards the China label market."

My thoughts on the A2 Milk share price

I think A2 Milk has done a really good job of turning things around.

Commsec numbers suggest that A2 Milk is going to generate EPS of 18.9 cents, with further profit growth in FY24 and FY25.

At the current A2 Milk share price, that suggests that it's valued at 35x FY23's estimated earnings.

While that isn't as expensive as a number of ASX growth shares, I think the market now reflects the much-improved outlook, so I'd be less excited to buy today than a year ago. But I still think that it could outperform from here because of the necessary nature of infant formula and international growth.

Motley Fool contributor Tristan Harrison 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 Scott Phillips.

More on Opinions

Happy miner giving ok sign in front of a mine.
Opinions

Which ASX 200 stock offers 'material upside' amid continuing uncertainty over US tariffs?

Blackwattle Investment has identified one ASX 200 large-cap stock that is thriving on the uncertainty.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
Financial Shares

2 rising ASX financial shares with 'meaningful upside' still left: fundie

Financials outperformed every other sector in FY25, but there are still buying opportunities left, say these experts.

Read more »

A businessman hugs his computer and smiles.
Opinions

If I could only own one ASX 200 share for the rest of my life, it'd be this one

This is one stock I expect to own forever.

Read more »

Man ponders a receipt as he looks at his laptop.
Technology Shares

Brokers rerate 3 leading ASX 200 tech stocks

Experts reveal their ratings on the ASX 200 tech sector's three biggest companies.

Read more »

Person holding a blue chip.
Opinions

Buy alert! 2 ASX 200 blue-chip shares worth a look now: expert

Dylan Evans from Catapult Wealth has identified two blue-chip shares that he thinks are good buys today.

Read more »

Two happy woman on a couch looking at a tablet.
Opinions

Why I'm excited to see the results of these ASX 200 shares

These stocks could reveal very interesting insights.

Read more »

Young male investor smiling looking at laptop as the share price of ASX ETF CRYP goes higher today
Opinions

Why I just bought this 5.2%-yielding ASX dividend stock and plan to buy even more

This business is one of my favourites for dividends and total returns.

Read more »

A young female investor with brown curly hair and wearing a yellow top and glasses sits at her desk using her calculator to work out how much her ASX dividend shares will pay this year
Opinions

Why I'm still investing in ASX shares during tariff uncertainty

There are a few reasons why I plan to continue investing even during uncertainty.

Read more »